US & International Markets Show Consistent Reaction to Uncertainty

Before we jump into this week's Extreme Movers, I wanted to let you know that Omega Point's CEO Omer Cedar and I will be attending the S3 AIR Summit this Monday, June 13, at the NYSE to present "Data-Driven Superpowers for Institutional Investors." For those of you who will be in attendance, we hope to see you there.

Now on to this week's main course...

Over the last few issues of Factor Spotlight, we’ve introduced the latest tool in our arsenal to understand what is driving markets from week to week. The Extreme Movers portfolio allows us to apply hindsight to the prior week's momentum to understand the following key questions better:

1. Was the preceding week an alpha-driven or factor-driven week?
2. What are the factor characteristics of the stocks that drove the market?

This week, we will include an international version of the Extreme Movers portfolio to accompany the US. The Extreme Movers portfolios are weekly-rebalanced, market-neutral portfolios that consist of the top decile of stocks from the Russell 1000 and the MSCI ACWI ex-US, respectively, based on performance on the long side and the bottom decile on the short side. You can find additional information on the construction of the Extreme Movers portfolio in the May 22nd edition of Factor Spotlight.

Please see below for this week’s Market Summary recap and Extreme Movers portfolio summaries. Also, don’t hesitate to reach out if you want to understand more about the Extreme Movers portfolio or apply our methodology to a customized investment universe.

US Market Summary and Extreme Movers Metrics

US Market: 06/03/22 - 06/09/22

• A small rally from last week carried into early this week; however, the previous two days saw the US market back down during the five days ending Thursday. The S&P 500 and Nasdaq saw similar returns of -3.81% and -3.74%, respectively. The Dow wasn’t far behind, ending the period down -2.93%.
• Global central banks continue the fight against inflation, with the ECB signaling an upcoming rate increase. Fed action is almost a sure thing, as year-over-year inflation in the US increased in May. Stagflation fears are high, with expectations of recession amid rising rates & inflation.
• Despite the easing COVID restrictions in China earlier in the week, the country reinstated some earlier measures and is implementing a mass testing program. These moves further fuel global recession fears due to the continued disruption of global supply chains.

Extreme Movers Portfolio Performance

Please note that the portfolio's return will always be positive by constructing a portfolio that is long the top movers and short the bottom movers in an index. That said, there are several areas we want to observe around weekly performance:

1. Is the weekly performance below or above the recent median weekly performance? Above the recent median means that the Extreme Movers portfolios had much higher dispersion than a typical week, most likely driven by higher factor volatility.
2. Is the weekly alpha contribution below or above the recent median alpha contribution? Above the recent median demonstrates that the significant market moves were more alpha-driven than in a typical week. Below the median, the market moves were more factor-driven than in a typical week.

• The US Extreme Movers portfolio saw an uptick in performance this week. Still, it fell below the year-to-date median at 17.15%, again pointing to lower-than-usual return dispersion in the market.
• Alpha contribution decreased this week, landing right at the YTD median level. This drop signals more of a factor-driven market, specifically from style factors,
• Style factors played a prominent role relative to industry factors but were still a far cry from their peak during the week ending May 11th.

• The International Extreme Movers Portfolio showed a similar increase in performance this past week to the US version, creeping up to meet its year-to-date median.
• Post-March performance levels have been much more consistent than the US counterpart, avoiding much of the volatility in May.
• Style factors have quieted a bit since early May, as Country and Currency factors have contributed the lion’s share of the positive return in the portfolio. Alpha contribution has fallen below YTD median levels, highlighting less idiosyncratic opportunity in the international markets.

Extreme Movers Portfolio Exposure

Looking at the Extreme Movers from an exposure lens helps us decompose the individual styles and sectors associated with the portfolio's factor-driven performance and better understand broader patterns such as risk-on / risk-off or sector rotation.

• Real Estate fell out of favor this week. The sector not only experienced one of the most significant week-over-week allocations in the portfolio but also came in as the largest underweight.
• Health Care represented a small part of the portfolio this week, but the sector rebounded relative to last week's heavy underweight. This rebound potentially signals investors seeking a haven in a defensive industry.
• Information Technology, Energy, and Industrials all had strong positive representation in the portfolio, with the latter two sectors showing modest increases from last week.

• This week, high beta stocks continued to drive the US portfolio, but the portfolio also showed tilts towards high volatility stocks. All Beta and Volatility exposures were well above the YTD average.
• The value rotation showed a slight detour over the past two weeks, with the market favoring growth stocks (positive Growth exposure) while putting downward pressure on value stocks (negative Earnings Yield exposures). Quality was also out of favor.
• Interest Rate Beta exposure was negative, a considerable change from last week's highly positive exposure. The portfolio also saw a substantial increase in Oil Beta exposure, indicating this week's drivers were macro-influenced.
• Long-crowded stocks paid off this week, further aligning with the minor growth rally and the increased beta and volatility exposures.

• Consumer Discretionary and Energy dominated the International portfolio, coming in well above YTD averages.
• International Utilities saw the most remarkable change from last week, moving out of the heavy underweight and into a minor overweight.
• Financials was heavily out of favor in the international markets, facing considerable downward price pressures over the previous two weeks.

• Like the US portfolio, the international portfolio also tilted towards high beta and volatility names. However, the degree of beta was lower in the international portfolio.
• Growth and Value factors continued to diverge from the average, with Growth showing positive allocation in the portfolio and Earnings Yield showing negative exposure. Quality and Leverage were underexposed this week as well.
• Interest Rate Beta exposure turned slightly underexposed as global markets felt uncertainty over inflation and rate expectations.
• The international portfolio signaled upward price pressure for long and short crowded names.

Regards,
Alyx