Quantitative Strategies
Post-Election Factor Performance
The election gave small caps and Financials a boost, but didn’t help value stocks as hoped. Momentum and growth were the main winners within large caps, while no factors worked well among small caps, where more speculative names benefited.
CPI Report Brings Massive Rotation
The mild CPI report on July 11th kicked off a violent rotation out of mega-cap stocks, with the Russell 2000/S&P 500 performance differential at +4.5% for the day. Other factors reversed as well, with all major styles posting inverse performance relative to their year-to-date numbers.
Low Correlations Haven’t Helped
With the Mag 7 driving S&P 500 returns on a daily basis, the other 593 stocks have become less correlated with the S&P 500’s day-to-day changes. Although dropping correlations are typically a good thing for active managers, we think this time is different.
Speculation Within Large Caps
Risk appetite continues to be stronger within large caps compared to small caps, with AI themes more prevalent among the biggest names. Less volatile, more profitable firms are winning within small caps.
2024 Factor Performance
Factor performance was decidedly risk-on in February. Through month end, high-momentum names have outperformed the universe by 6.7%—we have to go back to the Tech Bubble to find a year when momentum had a stronger start.
2023 Factor Performance
Much like the overall market, factors reversed course in 2023 with most broad categories performing opposite of what they did in 2022. While two years ago, safety was a virtue, in 2023, the riskier the better.
Value Functioning Better Than Advertised
Value has worked much better within small caps compared to large caps for three of the last four years. This is nothing new, though, as value is historically a much better factor within the less efficient smaller-cap universe.
Factor Behavior Differs By Market Cap
Growth has performed much better among large caps than small caps, resulting in higher relative valuations for large caps. Based on factor valuations, we think value provides a more attractive large-cap entry point, while growth looks more attractive within small caps.
The Low-Quality Rally Of 2023
All the talk has been about mega-cap growth stocks, but equities with low-quality characteristics have fared even better. High beta, negative earnings, and those with high short interest have trounced the rest of our universe.
Low-Vol Back In Favor
The preference for defensive industries and sectors in April led to the outperformance of low volatility stocks, while growth lagged. YTD factor results have been poor, with negative spreads for momentum, profitability, value, and low-vol.
Growth Scare Hits Factors
Volatility returned, as two large bank failures had investors questioning growth expectations. Value was hit the hardest; growth was the main beneficiary.
The Calm After The Storm
Factor performance stabilized in February, recovering from a brutal start to the year. While those dynamics bled into the first two days of February, the trend quickly reversed as interest rates bounced off recent lows and stayed on an upward trajectory for the rest of the month.
Losing Momentum
After working well in 2022, Momentum took a beating out of the gates in 2023. Investors rejected the winners from last year and returned to the lowest quality and most speculative winners from the previous low-rate playbook.
2022 Quantitative Factor Performance: Year In Review
The rotation into Value continued into 2022, with Momentum joining the party and Growth the only blemish on the factor scorecard.
Momentum Offering Downside Protection
In a volatile year, protection is coming from what many may deem an unlikely suspect—the momentum factor. Contrary to popular belief, momentum tends to work better in down months than up months.
Earnings Revisions And Predictive Power
While the market moves back into sell-off mode, everyone seems to be waiting for the inevitable hammer to drop on earnings. If and when that happens, does it give us any insight about performance prospects? Or does it just make forward P/E ratios less attractive?
Factors Reverse Alongside Market
With equities rallying off bear market lows, factors also reversed during July. Except for Profitability, every factor category performed inversely to their year-to-date results. Momentum and Low Volatility were the biggest losers, while Growth was the biggest winner.
High-Beta Bounce
High-beta stocks outdid everything else during July, after getting crushed during the first half of 2022. At the end of June, Momentum was more correlated with low beta than any other time in our history.
Reversal Of Fortune For ValMo Investors
From the end of 2020 through May, stocks in the top quintile of both value and momentum have returned 60% versus 7% for the overall universe. That compares to the brutal stretch from 2016-2020 when the only way momentum investing worked was to not only disregard valuations, but to actively buy the most expensive momentum stocks.
Speculative Growth Selloff: Near The End?
The group is back to where it was before the pandemonium began, both on a price and valuation basis. While the move is likely to overshoot below median and historical lows, we think we’re closer to the final chapter than the midpoint.
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