As we’ve highlighted in recent weeks, growth has significantly outperformed value this year, as investors have tended to favor companies with strong balance sheets, stable cash flows, and good long-term prospects for growth. But could the trend finally be turning? The Dow Jones Market Neutral Momentum Index — a pure expression of the momentum factor in the domestic equity market — suggests it is.
When this index moves higher, it means that stocks that have recently done well are continuing to do well and stocks that have recently done poorly are continuing to do poorly. Momentum has performed very well this year and has been a popular strategy because of it. In the past few weeks, however, we’ve seen a large reversal in market leadership, as shown by the dramatic drawdown in this strategy since mid-May. Since its peak on May 15th, the index has fallen 8.3%.
While it remains to be seen if this reversal can last, incremental positive news on the virus’ containment and the approaching summer months have investors feeling more confident in downtrodden sectors of the market. Strategies focused on secular growth and bond-like equities may have to take a back seat to value for a little while — provided that the economy continues to show signs of improvement, bond markets stay healthy, and investor optimism about the restart continues.