Weekly Commentary - Momentum Lifts Stocks Higher
“Momentum Stocks Lead the Market Higher”
Tuesday, February 18th, 2020
When you hear the term “momentum stocks”, you might assume this is in reference to higher risk, growth, or maybe even technology companies.
In actuality, momentum can apply to any stock from any sector that has experienced an above-average trend of historical price performance, typically over a 6-12 month timeframe. It is one of the leading “factors” for attributing relative outperformance of stocks over time with the simple explanation that what has recently outperformed often (but not always) will continue to do so.
Stocks that are deemed to have relative momentum are often a reflection of the current market environment, as is the momentum factor itself. As a factor, momentum has historically performed best in the mid to late part of the market cycle. Right now, momentum stocks are leading the market higher.
Over the past 52-weeks through Friday’s close, the Dow Jones Industrial Average is up 13.6%, the S&P 500 is up 21.8%, and the iShares MSCI USA Momentum Factor ETF (MTUM) is up 25%. Most of the relative outperformance of MTUM vs. the S&P 500 over the past year can be attributed to the first 6 weeks of this year where the S&P 500 is up 4.6% YTD, while MTUM is up 9%.
Given that technology stocks have been leading the market higher, it should be no surprise that technology makes up a good portion of any momentum index, such as the one underlying MTUM; however, the combined weighting of the two tech-related sectors (information technology and communication services) are actually slightly under-weight in MTUM vs. the S&P 500.
The biggest relative over-weights are actually in two historically defensive sectors, utilities and real estate. Sources: iShares, S&P Global Indices Despite trading well above historical valuations with below market average earnings growth, real estate and utility stocks continue to attract investor dollars.
Technology stocks trade only slightly above historical valuations but have proven to show above-average earnings growth along with their relative price momentum strength. The strength in the two leading defensive sectors may be a product of low interest rates (which makes the dividend yield relatively attractive), or the relative defensive characteristics of these sectors that may be perceived as an offset to heavy technology weightings in portfolios, or a combination of both.
Regardless, utility and real estate shares, along with technology stocks continue to have significant divergence in performance vs. the more cyclical sectors of the market, namely energy, industrials and financials. The big loser to offset the strength in momentum is the value factor. Value stocks continue to drift lower in terms of relative performance, approaching a historical level of underperformance vs. both growth and momentum stocks, only eclipsed by the late 90’s.
And although the market continues to inch higher, in this case (as opposed to the late 90’s) we sense a lot of defensive posturing from investors, whether it be through strength in sectors like utilities and REITs, or the massive amount of inflows into low-yielding bond funds.
In the case of the latter, despite the 10-year Treasury sitting around 1.6%, less than a quarter of a percent from all-time lows, investors poured another $23 billion into fixed income mutual funds and exchange-traded funds this past week. At the current pace, investors are pumping cash into bond funds at a $1 trillion annual rate, according to Bank of America1.
That doesn’t strike us as investor euphoria and we continue to see the relative skepticism in investor dollars as a contrarian indicator of strength for the market.
Wayne Wagner Jr., ChFC Vizionary Wealth Management
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