Inside Markets — Momentum Factor Unwind

The recent momentum factor unwind has likely run its course with a peak-to-trough decline of ~13% as of last Thursday. This was the fourth momentum unwind this calendar year with average drawdowns in the 10-15% range. Fed policy is usually an important swing factor for risk sentiment given its influence on bond yields that sit in the denominator of the discounted cash flow (DCF) pricing model. The momentum factor is a rolling 12-month performance-based metric that currently includes a lot of high multiple members of the Nasdaq 100 (NDX), which recently peaked following the Fed’s ‘hawkish rate cut’ on 10/29. The sudden appetite for risk follows weekend Fed comments that seem to favor December easing. While near-term rate policy can cause swings in risk sentiment, the cut/no cut debate for the December meeting obscures an important fundamental development. The October meeting revealed the Fed will end its QT operations on December 1, which means liquidity conditions are set to materially improve.