Morning Notes — Momentum Window

By late summer, equity positioning in value sectors (Materials, Financials and Energy) had declined ~40% year-over-year.   The Q4 cyclical/value rally retraced ~20%, which currently leaves positioning down ~20%.  Value outperformance in Q4 was very apparent, but investors used sidelined cash to add exposure rather than sell their quality/growth stocks.  That changed when 10-year yields broke above ~1.45%.  If bond yields find a near-term peak like we expect, there’s an opportunity for quality/growth to bounce but stay cautious on the group as we move into April/May.  Why? Momentum is an equity strategy defined by a 12-month window.  It captures where we are today and where we were 12 months ago.  As we moved toward the end of March, we exit the February/March weakness in the SPX (bottomed 3/23) and relative underperformance in value sectors, particularly Energy and Financials.  The momentum window is moving forward and will soon pull in value sectors.  Roughly 70% of quant investors use some form of multi-factor model with momentum as major influence.  This could lead to an acceleration in the value rally (estimate we’re halfway through), but also an acceleration in the rerating of high-multiple stocks as they gradually fall out of the 12-month momentum window.