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2023 Small Cap Factor Review

Last year's factor returns rivaled an exciting sports matchup - lead changes, second half comebacks, and surprising finishes

Read 2022 factor review here

All data in this post relates to the Jackson Creek small cap universe of stocks.

Value was the top performer in 2023 among the five key factors we watch. Medium-term momentum (MTM) was the worst performing factor and the only one with a negative spread for the year. Volatility's 2023 calendar year return was essentially unchanged from 2022.

Source: S&P Global; Jackson Creek

The above chart does not explain the factor story during the year. The bar chart is simply a snapshot of the cumulative returns as of the last day of the year. It fails to capture the ups and downs experienced each day, week, month, and quarter.

One of the intriguing takeaways from this limited view is the negligible return to Volatility. This might suggest Volatility did not change much during the year. Of course, the return path Volatility took during the year was anything but flat.

We noted a couple times during 2023 how Volatility was faring (read Role Reversal & Halftime Update). The factor began the year with a very positive spread, quickly reversed and turned negative, then made another positive run, followed by a second downturn, before turning positive in the final two months to finish at the same level it started the year.

Source: S&P Global; Jackson Creek

In one of the previous posts (read Are We Heading For More Volatility?), we ran an exercise to see how correlated Volatility's return path was to previous years (just back to 2019 for simplicity). Here, we update that analysis and see that 2023 daily Volatility spreads were most closely correlated to 2021 (a 0.53 correlation coefficient). Through the first quarter of 2023 it had been most positively correlated with 2020. For the full year, Volatility was the most inversely correlated with 2020's path, so a significant change.

Volatility - 5 Year Correlation Plot

Source: S&P Global; Jackson Creek

Here is the Volatility chart we've shown in the previous posts that shows every year since 2000, now updated for the full year. During the summer, it looked as if Volatility might produce spreads comparable to those seen in 2020 (light blue line), 2003 (yellow), or 2009 (green) - other years of large equity market moves.

Source: S&P Global; Jackson Creek


Looking at Value, the original bar chart might suggest the factor dominated all the others. Yes, but that was not the case all year. It was definitely a second half comeback (read Third Quarter Factor Update), particularly during the third quarter (Value's coach must have given a great halftime speech!) After trending negatively during the early months and skirting the year's lows in the summer months, the Value spread turned positive until reaching its high in November.

Source: S&P Global; Jackson Creek

Value and Volatility showed their negative correlation during the latter part of the year. Almost on cue, just as Volatility turned negative, Value began its positive run. During 2023, the two factors had a -0.78 correlation coefficient. That was the largest magnitude - positive or negative - relationship between any of our five key factors for the year. It was also greater than the long-term correlation of -0.37.

2023 Factor Correlations

Source: S&P Global; Jackson Creek

The commentary in this post has focused on Value and Volatility, but here is the full chart of each of the five factors in 2023.

Source: S&P Global; Jackson Creek

And, as we've previously done, here is the same chart with the past few years as a comparison.

Source: S&P Global; Jackson Creek



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