In terms of long-term planning, corporate executives are often tasked with choosing between expanding their business or returning cash as a way to reward shareholders. In the quant world, the two decisions have a consequence on future stock returns.
A review of Quality factors, as well as the lower valuations of High Quality stocks, supports the current High Quality cycle amid rising market volatility. The Leverage factor may provide particularly strong backing for High Quality stocks.
Following 2016 underperformance, High Quality stocks eked out an advantage over Low Quality stocks to begin 2017 (+5.3% versus +2.1%, respectively). Yet, the “Junk Rally” trend seems difficult to reverse.
Performance and valuation of the three Quality factors are diverging. From a valuation standpoint, we might see a reversal in performance, with the Stability factor weakening and the Leverage factor strengthening.
Recent “hedge” fund trauma marks the end of hedge fund mania. The risk in quantitative models: Never bet the entire farm on any statistical model when the unpredictability of the human factor is involved.