InfoTech Frenzy Fuels Risk-On US Markets Amid Worsening Macroeconomic Conditions

Market Summary

US Market: 9/1/2023 - 9/7/2023

• US headline indices declined this week. The S&P suffered the most significant drop, losing -0.94% over the five trading days ending September 7th. The Nasdaq and the Dow trailed closely, with declines of -0.84% and -0.80%, respectively.
• Worsening housing affordability driven by low demand, rising oil prices, and increased yields in anticipation of potential rate hikes have experts sounding alarms about the global economy's future. David Rosenberg warned, “A recession will hit by spring, and the S&P 500 could plunge by 25% or more”.
• The annual G20 World Leaders Summit is currently on its way in New Delhi, with sustainable development as the primary agenda. However, discussions on the topic of Ukraine are also anticipated. Notably, both Vladimir Putin and Xi Jinping chose not to attend.

Extreme Movers Portfolio Performance

Note: Extreme Movers definitions can be found in Factor University on our website.

US Extreme Movers Volatility and Factor-Driven Speedometers

• The US Extreme Movers portfolio experienced a 13.0% return over the past week. This return classifies the week as "Neutral" in terms of volatility. It was the second least volatile week since June 22nd, with only the week of October 24th seeing less volatility.
• Factors accounted for 27.9% of this volatility, with style factors making up about two-thirds of the total factor performance. This level of factor volatility is the highest the portfolio has seen since the last week of June and is categorized as "Factor-Driven".

International Extreme Movers Volatility and Factor-Driven Speedometers

• International markets mirrored characteristics of the United States, with a 15.4% return over the past week, placing the week in the "Neutral" category. This level of volatility is the highest since the last week of July.
• Factors accounted for 34.02% of the portfolio’s volatility, marking the highest percentage since the week of April 20th. This places the portfolio in the “Factor-Driven” category.
• Of the total factor performance, country factors represented three-fifths. Notably, Japan accounted for half of this country factor contribution.

US Extreme Movers Portfolio Exposures

• Sector allocations were far more dispersed in the US Extreme Movers portfolio this week than they were the week prior. Information Technology reached its 97th inception-to-date percentile at a 34% long allocation which was driven by a 19% allocation to Software stocks.
• An 11% long allocation to Oil, Gas, & Consumable Fuels led to a rebound in Energy stocks in response to sharp rises in Crude Oil.
• Industrials were broadly out of favor this week, landing at the sector’s 2nd trailing-twelve-month percentile. Aerospace & Defense accounted for a 5% short allocation followed by Professional Services at 3%.
• Life Sciences Tools & Services contributed half of Health Care’s 16% short allocation. This was made up of predominantly small-cap stocks within the industry.

• Despite more dramatic sector tilts, the portfolio remained consistent on beta and residual volatility exposures this week. Investors continue to favor high-beta stocks relative to low beta in the current environment.
• The pro-growth and anti-value and quality posture persisted as well due to the heavy long allocation to Information Technology. Management Quality reached as low as its 23rd percentile mark since inception in Barra’s US Long Term model.
• Given the recent climb in oil prices, it’s no surprise to see the portfolio leaned heavily into stocks with high Oil Beta exposure. The 0.48 exposure falls in the 82nd percentile over the last twelve months and is the highest in over a month.
• Crowding factors showed particularly significant signals. The positive exposure to HF Crowding and negative exposure to Short Interest in Wolfe’s US Broad model point to a week of tailwinds for hedge fund managers holding popular positions.

International Extreme Movers Portfolio Exposures

• Though to a lesser degree, the International Extreme Movers portfolio also showed heavier sector dispersion this week. Information Technology was the key winner, driven by IT Services stocks and Semiconductor stocks in Taiwan.
• Health Care was out of favor across industries and geographies but Pharmaceuticals made up the biggest portion of the sector’s 9% short allocation which fell in the 7th percentile on an inception-to-date basis.
• Banks claimed a 10% short allocation within Financials while the rest of the sector saw mixed performance from both an alpha and factor perspective.

• The International portfolio flipped on beta factors this week but remained moderately positive on residual volatility due largely to the long allocation to Oil, Gas, & Consumable Fuels and the short allocation to Banks.
• Growth exposures were fairly flat but value perked up, particularly Earnings Yield and Dividend Yield which suggests investors are moving into dividend-paying stocks and stocks with more attractive valuations relative to earnings.
• Like the US portfolio, the International portfolio also marked a flight into stocks with a positive relationship to oil prices. The top industry contributors to that exposure were Metals & Mining, Insurance, and Oil, Gas, & Consumable Fuels.

International Extreme Movers Portfolio Country Exposures

The chart presents the portfolio's exposures to various groups in the Developed and Emerging Markets, highlighting the three most notable country contributors for each respective group's allocation.

• The Developed vs. Emerging Markets scale evened this week with just a slight favor in the developed regions. The sub-regions underneath, however, are where we noticed particularly significant positionings.
• Japan captured its largest long allocation in over a year at 28% while Emerging Markets Asia saw a 36% long allocation in aggregate. Chinese Real Estate stocks contributed significantly to the boost in Asia.
• EMEA struggled across both markets. In Emerging Markets, the Europe, Middle East & Asia allocation fell to its 3rd percentile over the last year while the Developed allocation landed in the 12th percentile.

Regards,
David