US Investors Sharpen Defensive Positioning

Market Summary

US Market: 10/20/2023 - 10/26/2023

• The US Market Indices experienced sharper drops this week compared to last week's decline of -1.85%, with a combined average decline of -3.31%. The Dow Jones faced the least decline, ending at -1.89%. The S&P 500 wasn't far behind with a drop of -3.29%. Meanwhile, the Nasdaq experienced the most significant dip with a weekly return of -4.56%.
• In the third quarter, the US GDP experienced a rise of an annualized 4.9%, as stated in official reports. This growth occurred despite 22-year peak interest rates and fluctuating consumer sentiment. Janet Yellen remarked that while this suggests a “strong” and “resilient” economy, the GDP uplift was primarily fueled by a transient surge in spending, which might not persist into the following quarter.
• Unexpectedly, Russia hiked its interest rates by 200bps, reaching 15%, in efforts to curb mounting inflation. In contrast, the US reported steady inflation figures in recent weeks, leading to ambiguous investor sentiments regarding future interest rate trajectories.

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 returned 15.3%, slightly below last week’s 16.0%, yet it continues to be categorized as “Volatile”.
• Factors contributed to 23.7% of the portfolio's volatility, which is the lowest since the final week of August, eight editions back. This level of factor contribution stands at the 49th percentile since inception and carries a “Neutral” label.

International Extreme Movers Volatility and Factor-Driven Speedometers

• The International Extreme Movers Portfolio reported a 14.3% return, landing it in the 39th percentile TTM and the 43rd percentile ITD. As a result, the week's performance was deemed "Neutral".
• Factor accounted for only 17.0% of this week’s volatility, the lowest levels since June 2021, or 122 weeks prior. This is at the 9th percentile ITD in terms of factor contribution to volatility.

US Extreme Movers Portfolio Exposures

• The US portfolio was broadly defensive this week as it leaned heavily into Consumer Staples and Utilities and away from Real Estate, Financials, and Information Technology.
• The Consumer Staples sector saw its largest allocation since inception in the US Extreme Movers portfolio this week. Food, Beverages, & Tobacco accounted for 17% of the 26% long allocation.
• Software & Services made up the majority of the 23% short allocation to Information Technology which fell in the 6th percentile since inception.

• The US portfolio leaned further away from beta and residual volatility factors this week, pointing to a greater degree of risk aversion in the market. Beta factors all reached the bottom deciles since inception and Axioma’s Market Sensitivity factor landed in just the 3rd percentile since 2007.
• Value and quality factors were clearly favored over growth as all factors in those two categories sat in positive territory. The 23% short allocation to Information Technology was the leading contributor across the growth and value positioning.
• Oil Beta and Interest Rate Beta exposures cooled after two weeks at elevated levels due to offsetting sector contributions in Information Technology, Financials, Materials, and Industrials.

International Extreme Movers Portfolio Exposures

• Consumer Staples was also the largest long allocation in the International Extreme Movers portfolio, which landed in the 98th percentile on a trailing-twelve-month basis. Food, Beverages, & Tobacco and Household & Personal Products contributed 11% of the 12% position.
• Chemicals and Metals & Mining stocks drove the 9% short allocation to the Materials sector. That allocation reached the 12th percentile on a trailing-twelve-month basis.
• Electrical Utilities stocks in Brazil made up half of the 8% long allocation to the Utilities sector. That allocation marks the highest for Utilities since the beginning of September.

• Profitability, Investment Quality, and Interest Rate Beta were the only positive exposures in the international portfolio this week. The long allocation to Consumer Staples stocks led the 0.06 exposure to Barra’s Profitability factor.
• Both beta and residual volatility factors remained in negative territory. Consumer Staples accounted for most of the anti-beta positioning, while the underweight to Materials drove the majority of the negative residual volatility exposure.
• Materials also influenced the macro posture of the portfolio this week. Approximately half of the -0.29 exposure to Oil Beta was attributable to Materials stocks.

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.

• Though to a lesser degree, Emerging Markets were favored over Developed Markets for the fourth consecutive week. Emerging Markets accounted for a 6% long allocation while Developed Markets came in at a 6% short.
• EM Americas overtook Asia and rose to a 10% long allocation this week. Brazilian Utilities and Financials stocks were in favor, accounting for a combined 6.5%.
• Indian stocks were down across the board as the 6% short allocation fell to just the 3rd percentile since the portfolio’s inception.
• Materials and Industrials stocks in Canada made up the 5% short allocation to DM Americas. That short allocation marked the 6th percentile on a trailing-twelve-month basis.

Regards,
David