Market Movements are Factor-Led, Not a Tech Rotation

The recently touted theory that tech was entering a rotation as stock pickers began “piling into companies set to benefit from U.S. tax cuts” has been challenged by some, according to a recent article in Bloomberg.

“A few heavy hitters are dumping factor positions that incidentally hurt chipmakers and software companies,” the article argues, “and once they’re done, the rally will resume.” The article asserts that while the recent market movement seemed to be tax-related, the “plunge in the momentum trade” coupled with proportionately high value gains were extreme. It suggests a more likely explanation might be that computer-driven funds “liquidated or readjusted factor exposure.”

Andrew Lapthorne, global head of quantitative strategy at Societe Generale SA, is quoted: “To get such a strong relationship between a factor and performance always seems a little bit smacking of systematic.” The article also cites comments from Pravit Chintawongvanich, head of derivative strategies at Macro Risk Advisors, who says that the recent decline in long-short momentum suffered by the Bloomberg U.S. pure momentum portfolio could have been caused by “a concentrated bet unwinding,” adding that, once the unwind “runs its course”, those stocks should resume their rally.

The article highlights a similar argument from Lapthorne regarding value stocks. “We’ve seen this before,” he says. “Everyone makes a song and dance that tech stocks have fallen, but then you scratch below the surface and it looks factor-led.”