Regional Bank Turmoil’s Historic Factor Influence

David Bromberg

Product Solutions Consultant

Mar 19, 2023

Mar 30, 2023

Market Summary

US Market: 3/10/2023 - 3/16/2023

It was a mixed week for the US headline indices. The Nasdaq posted a strong performance, returning 3.3% in the five trading days ending March 16th. The S&P 500 was also green at 1.1%, and the Dow ended relatively flat at -0.03%.
Following last week’s Silicon Valley Bank collapse, regional banks fell under extreme pressure from depositors. On Friday, several large US banks added a combined $30 billion in deposits to First Republic Bank to prevent another collapse.
The consensus on Fed strategy in March has shifted due to regional bank turmoil. CME reported a likelihood of ‘no rate hike’ as high as 65%.

The US Extreme Movers portfolio returned almost 25%, which places this week’s volatility in the 94th percentile of all weeks since the beginning of 2007.
Systematic factors drove more than half (52%) of the portfolio’s return, which landed in the 97th percentile of all weeks since the beginning of 2007.
Identifying alpha-rich stocks becomes incredibly difficult in a “Very Volatile” and “Very Factor-Driven” environment. Fundamental managers likely found that their portfolios were moving almost entirely due to macro forces.

Though to a lesser degree, elevated levels of volatility and factor influence also impacted the international markets. The International Extreme Movers portfolio returned 19%, 39% of which was attributable to factors that categorize the week as both “Very Volatile” and “Very Factor-Driven.”
The international market volatility ranked in the 81st percentile since the beginning of 2007, and factor influence ranked in the 84th percentile over the same timeframe.

This week's story continues to revolve around Financials, with an even larger short allocation than last week's. The downfall of SVB Financial Corp caused subsequent bank runs resulting in falling stock prices across the industry, most resoundingly, Credit Suisse (-25.5%) and First Republic Bank (-72.9%).
Utilities, Health Care, and Consumer Staples landed in the top decile ITD. Utilities were led almost exclusively by Electric Utilities, while Health Care and Consumer Staples saw positive allocations to all Industry Groups.

This week's portfolio was mostly short Volatility and Beta factors, with most landing in the bottom quintile ITD. These negative exposures came from both the long and short books and were led by allocations in Utilities, Consumer Staples, Consumer Discretionary, and Industrials.
Earnings Quality was the biggest winner this week, with all of its positive allocation coming from the short book, meaning that investors bet against companies with high uncertainties in revenues and profit.
All sectors contributed to the short allocation to Interest Rate Beta, with Financials leading the way, accounting for half of the contribution.
Earnings Yield's negative exposure came equally from the book's long and short sides, suggesting that investors favored expensive stocks relative to cheap ones.

The International Extreme Movers portfolio had similar allocations to its US counterpart, with Health Care, Utilities, and Consumer Staples leading the long allocation, while Financials ranked at the 1st percentile ITD.
Of the 27 represented countries, only China, Israel, Hong Kong, Turkey, and South Korea had a positive allocation to Financials. In contrast, the United Kingdom, Switzerland, Japan, and France had the most negative allocations. Two-thirds of the negative allocation to Financials came from Banks.
European and North American countries generally contributed to the short book, while Asian countries, with Japan, Hong Kong, and South Korea in the lead, contributed to the long book. For instance, Japan alone accounted for 19% of the long side of the book despite having a sizeable short allocation to Financials.

The portfolio was exposed to volatility at the TTM mean level, with high-volatility stocks allocated to both the long and short sides. In contrast, exposure to Beta was in the bottom decile ITD. Both the long and short sides of the portfolio had underweight exposure to Beta, indicating that investors favored anti-beta names and bet against high-beta names.
The negative allocation to value came solely from the short book, indicating that investors avoided cheaper stocks without necessarily favoring expensive stocks.
All 42 countries in the portfolio, with Canada in the lead, contributed to the negative allocation to Interest Rate beta. As expected, Financials accounted for more than half of the contribution to this negative exposure.

Regards,
David

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