Momentum — and the equity style factor of the same name — was decidedly on in January. Then came the February stock market swoon. Was it a pause that refreshes? We explore.
The early February market swoon dented momentum strategies (those focused on stocks trending higher). Yet history reveals this factor is rewarded in times of economic growth — and that support remains firmly in place, we believe.
Investors may be chasing momentum without recognizing it. The implied exposure to momentum via broad market exchange traded funds (ETFs) dwarfs direct flows into momentum-named products. This may be bolstering the factor’s performance.
Momentum’s moment is not over, in our view. Near-term air pockets are possible. Yet we believe a solid global growth outlook and strong earnings momentum, particularly in the U.S. and EM Asia, offer good reasons to look through near-term volatility.
A rosy macroeconomic picture is complemented by a solid earnings backdrop that may lend support to equities and further outperformance of momentum. Every region collectively posted double-digit earnings growth in 2017 for the first time since 2005 — excluding the post-global financial crisis pop in 2010. See the Earnings growth goes global chart below. The trend is poised to accelerate in 2018, with forward earnings estimates rising at the fastest pace since 2003 (excluding 2010 again).
Investor flows are another powerful, if sometimes stealthy, force behind momentum’s momentum. Direct flows into momentum funds are only one source of exposure to the factor. The implied exposure to momentum via broad market ETFs dwarfs the direct flows into momentum-specific products. Why? Momentum is implicit in many other ETFs — investors may be chasing it without even knowing. Our BlackRock factor finder shows momentum exposure in the S&P 500 Index was 27% as of December. It was 66% in the MSCI EM Index. This illustrates how an investor may well be exposed to the factor without making a conscious allocation.