Value Stocks: Don’t Call it a Comeback

Value Stocks: Don’t Call it a Comeback

Recent extremes in the returns for Value and Momentum stocks could be suggesting a change in leadership ahead.


Value and Momentum each had back-to-back extreme returns (five-sigma) days on Monday September 9th and Tuesday September 10th of this year.

Some specifics: on Monday, the Dow Jones Thematic Market Neutral Value Index (“Value”) was up 3.45% -- its best day since its inception on December 31, 2001. The Index followed this gain up on Tuesday with a 2.56% return, its 7th best day since inception.

In contrast, the Dow Jones Thematic Market Neutral Momentum Index (“Momentum”) was down 4.53% and 4.08%, its two worst days in the past 10 years -- and the 10th and 15th worst days since inception. The first chart below shows the distribution of single day returns for the Value Index; the second shows the distribution of single day returns for the Momentum Index.

Distribution of Market Neutral Value Returns 2002-Present

Chart: Distribution of Market Neutral Value Returns 2002-Present

Source: The Dow Jones Thematic Market Neutral Value Index, 12/31/2002 – 09/10/2019. Figure 1A: Distribution or daily returns for the Dow Jones Market Neutral Value Index. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

Distribution of Market Neutral Momentum Returns 2002-Present

Source: The Dow Jones Thematic Market Neutral Momentum Index, 12/31/2002 – 09/10/2019. Figure 1B: Distribution or daily returns for the Dow Jones Market Neutral Momentum Index. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

Of course, it is normal for Momentum and Value to move in opposite directions, as shown in the next chart. The red points mark the observations for the two days mentioned above. All but one of the points to the left of these are from the early part of the 2009 recovery – the last momentum crash. The orange ellipse contains points within two standard deviations of the mean and the purple ellipse contains 95% of the samples.

Daily Long/Short Returns Since 2002

Chart: Daily Long/Short Returns Since 2002

Source: Dow Jones, 12/31/2002 – 09/10/2019. Figure 2: Distribution of Daily Value and Momentum Returns. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

It is an understatement to say that the recent factor moves are rare. This is the sort of thing that factor geeks wait decades for. The good news for those of us fitting that description is that these sorts of events tend to cluster. This is evident from the next chart, which shows historic rolling 20-day returns for the two factor indexes -- and that sharp reversals in these factors are the norm. In fact, the worst day for Momentum was April 9, 2009 (down 7.56%). Seven market days later, on April 20, 2009 Momentum had its best day (up 10.35%)!

Rolling 20-Day Long/Short Factor Return

Source: Dow Jones, 12/31/2002 – 09/10/2019. Figure 3: Rolling 20-Day Value and Momentum Returns. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

One last point, volatility in these indices is typically high around regime changes and big market moves. While a lot has changed recently (I would argue we entered a new regime in Q4 2018) the S&P 500 is up only 3% from where it was 12 months ago. It wouldn’t surprise me to see a few more large moves in Momentum and Value in the near future.


Definitions:

The Dow Jones Thematic Market Neutral Momentum Index is designed to measure the performance of a long/short strategy utilizing long positions in high-momentum companies and short positions in low-momentum companies. Momentum is calculated by ranking stocks by their 12-month historical total return, starting one month prior to reconstitution.

The Dow Jones Thematic Market Neutral Value Index is designed to measure the performance of a long/short strategy utilizing long positions in value companies and short positions in growth companies. It is equal weighted, dollar neutral and sector neutral. The index rebalances monthly by identifying the most undervalued stocks as long positions and the most overvalued stocks as short positions, of approximately equal dollar amounts, within each sector.

Equity market neutral describes an investment strategy where the manager attempts to exploit differences in stock prices by being long and short an equal amount in closely related stocks.

Momentum refers to an investment approach that aims to capitalize on the continuance of existing trends in the market.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

Standard deviation is a statistic used as a measure of the dispersion or variation in a distribution, or dataset, from its mean, or average; it measures the volatility of an investment’s return over a particular time period; the greater the number, the greater the volatility.

Value refers to an investment approach that aims to select stocks that trade for less than their intrinsic values.

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