March 8, 2021
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.