Alpha Drives US Markets Alongside Late Inflation-Led Rally

Over the past several months, we've introduced Extreme Movers, the latest tool in our arsenal to understand what is driving markets from week to week. We also debuted an international version of the Extreme Movers portfolio to help investors compare fluctuating alpha opportunities and factor-driven dynamics between the US and the world. The Extreme Movers portfolios allow 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?

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 22 edition of Factor Spotlight.

‍US Market Summary and Extreme Movers Metrics

US Market: 11/04/2022 - 11/10/2022

• Markets saw a massive rally driven by the week's final days. The Nasdaq led the pack at a 7.5% return for the five days ending Thursday, while the S&P 500 and Dow weren't far behind, with 6.4% and 5.4% returns, respectively.
• Inflation appears to be cooling off, with the October US CPI report landing lower than expectations at 7.7%. The market rallied over the last two days of the week, seemingly due to the improved inflation outlook.
• Crypto markets were on a roller coaster ride this week, with the solvency issues and eventual collapse of FTX causing significant headwinds in the crypto world during the first half of the week.

We want to note to our readers that the analysis below describes the week's performance up through Wednesday, November 9; however, given the strong market rally on the 10th and 11th, we expect several reversals to impact next week's Extreme Movers positioning.

• The US risk-off positioning from this week will likely shift heavily towards risk-on, as exhibited by the strong positive return in the beta and volatility factors.
• Sector drivers will likely turn to favor Software and Oil & Gas.
• Rate-sensitive stocks may see downward pressure as the market adjusts sentiment around the inflation news.

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 a return of 28.8% this week, which is in the 95th percentile of returns on a YTD basis. Only two other weeks had higher dispersion (measured by the weekly return) - the weeks of March 2, 2022, and May 11, 2022.
• Alpha contribution was also in the 95th percentile on a YTD basis, with over 80% of the weekly return attributable to idiosyncratic performance. This week marks the highest alpha contribution since August and the third-highest YTD.
• A short position in Software & Services and long positions in Semis and Metals & Mining led industry contributions.
• A short allocation to beta factors led style contribution.

• The International Extreme Movers Portfolio’s return was 20.7%, somewhat neutral at the 77th percentile of YTD weekly returns.
• Alpha contribution, which was 64% of the total return, was also relatively neutral at the 39th percentile of YTD weekly alpha returns.
• Style contribution was in the 2nd percentile this week, with an almost negligible return contribution of less than 1% of the total return. Short exposure to Brazil, coupled with long exposure to China and Korea, drove the country contribution.

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.

‍To provide a relative perspective on the size of the exposures, we’ve adjusted the third column from YTD Average to YTD Ptile (“percentile”). With >200 trading days into the year, we’ll highlight any exposures that are in the top 10 trading days (95%+) or any exposures in the bottom 10 days (<5%).

• Materials had the most prominent long allocation this week, representing the highest exposure for the sector all year. Industrials allocation remained strong and was in the top 10% of YTD exposures for the sector.
• Financials dropped to 0% allocation, reverting close to its median after having its largest YTD allocation last week.
• Information Technology was the most prominent short-sector exposure, driven by Software and Services; however, Semis held the most considerable long-industry exposure in the portfolio, highlighting heavy dispersion within Information Technology at the industry level.

• The risk-off, value-oriented trend continued this week as investors fled away from risky, high beta-driven positions and into stocks with substantial value and quality characteristics. Profitability exposure from the Wolfe model was in the top 5% of YTD exposures (97th percentile).
• Exposure to Interest Rate Beta remained strong, driven by the short positions in Software & Services.
• Both long & short crowded names experienced heavy downward price pressures; Software & Services almost wholly drove the long-crowded underexposure.

• Materials, driven by Metals & Mining, in the International portfolio swung from the lowest allocation last week to the highest this week and is now in the top 10% of YTD exposures (92nd percentile).
• Communication Services fell from grace, moving from one of the top long exposures to the top short exposure this week. This week’s allocation is in the bottom 10% of YTD exposures (6th percentile).
• Despite a neutral sector position in Information Technology, the industry level reveals that long Semis exposure was at the highest level on a YTD basis, while short Software exposure was at the most heightened negative level on a YTD basis.

• The International portfolio saw a significant value tilt, with most of the value factors in the top 10% YTD exposures.
• Contrary to the risk-off positioning of the US portfolio, the International portfolio tilted into high beta and volatility stocks this week.
• Interest rate-sensitive stocks felt heavy downward pressure internationally, with this week's exposure falling in the bottom 5% of YTD exposures (4th percentile). Long and short crowded stocks also felt downward pressure, as illustrated by the substantial negative exposure to the crowding factors.

Regards,
Alyx