Market Shifting From Momentum to Value

A pair of brief pieces in Barron’s, one by columnist Jack Hough and the other on behalf of JPMorgan, discuss the implications of the recent selloff in momentum stocks. As Hough explains, “momentum investing refers to the practice of buying what’s already going up” and can be used within a broader strategy, such as by “looking for recent stock momentum among [a portfolio’s] value picks” when rebalancing. Many portfolios employing a “long/short momentum” strategy lost 15% to 30% from January to March due to declines in some of last year’s top performing stocks. Because early April is a common time to rebalance portfolios, the decline in these stocks may continue or accelerate, according to a recent JPMorgan report. Further, as Hough notes, “since 1986, the average period of poor performance for momentum strategies has lasted eight months,” so the past two months of selling may not be the end. JPMorgan notes in Barron’s that “analyzing the anatomy of a 12-month price momentum long/short strategy over the past 30-plus years, the current selloff of 15% is not unusual compared to the average decline of 21% with average duration from peak to trough.” Although this history is relevant, JPMorgan says, “the current period is unique given the outsized role central bank policies have played in the economy.” It goes on to note that recent Federal Reserve developments “have pushed the dollar lower and have implicitly provided relief to emerging market assets and commodities” and “further convergence in policies of major central banks will continue to drive a reversal in macro momentum trends, which JPMorgan suggests will be “a positive for value stocks and a negative for momentum stocks.” Thus, JPMorgan urges “avoid[ing] exposure to pure momentum stocks” and “rotating into more reasonable valuation (i.e., momentum at reasonable price).” It also observes that “value remains unloved and offers higher opportunity” than momentum now, and “as long as growth remains lackluster (stagflation) value will likely outperform momentum.”