Slowing Inflation Quiets Factor Noise in the US
US Market: 4/7/2023 - 4/13/2023
- US headline indices rallied this week. The Dow led the way with a 1.6% return, while the S&P and Nasdaq followed at 1.0% and 0.6%, respectively.
- The March CPI report showed a 5% year-over-year increase, slightly lower than expected, representing the ninth consecutive month of slowing inflation.
- The February Fed meeting minutes showed officials expecting a moderate recession in 2023 following the banking crisis spurred by the Silicon Valley Bank collapse. Economists also indicate that a 25 basis point hike will be the likely outcome in May.
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
- In a week of lower macro turbulence, the US Extreme Movers portfolio reverted to "Very Alpha-Driven" territory. According to our methodology, the alpha availability in the US market landed in the 92nd percentile of weeks since January 2007.
- In terms of volatility, US markets were calmer. The portfolio returned 11.2%, which fell in the 33rd percentile of volatility since 2007. So, although more alpha was available, managers likely had little success finding significant return magnitudes.
International Extreme Movers Volatility and Factor-Driven Speedometers
- The International portfolio also pointed to calm markets outside the US this week. The portfolio’s 14% return falls in the 39th percentile since inception.
- Unlike its US counterpart, the International portfolio indicated a relatively average factor and alpha availability week. Stock prices were driven both by market forces as well as idiosyncratic alpha.
US Extreme Movers Portfolio Exposures
- This week, the allocation to industrials landed in the highest percentile on a trailing twelve-months (TTM) basis and the 99th percentile inception-to-date (ITD). Capital Goods, an industry group of physical assets used to produce goods and services, contributed almost two-thirds of the allocation.
- Nearly all industries contributed negatively to the Information Technology sector, which landed in the bottom decile ITD. The most notable contribution industries were Software and Semiconductors & Semiconductor Equipment.
- Banks led the Financials rebound, accounting for over half of the 9% long allocation. Meanwhile, all industries contributed to the short allocation to Consumer Services, which had one of the heaviest short allocations ITD at the 4th percentile.
- The Alpha-Driven nature of this week’s markets is evident, as nearly all style factor exposures landed within the two middle quartiles (25% - 75% range) on a TTM and ITD basis.
- Long positions drove the Beta and Volatility exposures. In contrast, the short positions diversified the exposure, indicating that investors directed their attention towards high beta, high volatility stocks for both long and short investment ideas.
- Popular short stocks rallying adversely affected investors' portfolios, as indicated by the high Short Interest exposure. The same can be said for popular longs declining, though to a lesser degree, based on the underexposure to HF Crowding.
International Extreme Movers Portfolio Exposures
- This week's allocations have stark differences among sectors, with Health Care, Materials, Financials, Utilities, and Real Estate ranking in the top quartile, while Consumer Discretionary, Consumer Services, Consumer Staples, and Information Technology placed in the bottom decile ITD.
- The long book saw a significant representation of BRICS nations, with Hong Kong, Brazil, and India contributing a combined allocation of 30%, where Brazil alone accounted for 20% of the total allocation. The short book saw a heavy 20% allocation to Japan, followed by other short allocations across Asia and the Middle East.
- The Health Care sector had contributions from all industries, with significant weight from Hong Kong and South Korea. Communication Services had mostly Asian regions driving the allocation, with Japan contributing to one-third. In Information Technology, all major short contributors were from Asian countries, particularly Taiwan.
- The exposure to Volatility was driven by the longs and diversified by the shorts, implying that investors preferred high-volatility stocks for both sides of the book. In contrast, the exposure to Beta was driven by the shorts and diversified by the longs, suggesting that investors preferred low beta names for both sides of the book.
- Value superseded Growth this week. The negative exposure to Growth and positive exposure to Value was driven exclusively by the short book, suggesting aversion towards stocks displaying growth and anti-value behavior.
- Profitability exposure hit TTM lows, coming from both sides of the book equally. Investors fled from stocks with high ROA and Gross Profit Margin and favored those with low profitability metrics.
- The exposure to HF Crowding and Short Interest suggests that investors favored popular longs and avoided popular shorts.