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Big Momentum in Little Capitalization

Yes, the title is a play on the movie 'Big Trouble in Little China'. No this has nothing to do with the movie or China. I guess you can call it click-bait.

A couple of our recent posts took deeper dives into Value returns. The first compared a recent week with an extreme return to other extreme periods over the years. The second provided additional historical perspective, including how the volatility of Value returns has picked up in 2022.

Here, we will shed light on Momentum. Specifically, Medium-term momentum (MTM) within the Russell 2000. The current standard deviation of MTM is at levels only seen during the GFC and early months of the pandemic. The chart below is the rolling 3-month standard deviation of daily MTM returns.

Chart 1: Daily MTM Returns, rolling 3M standard deviation

Rolling 3 month standard deviation of daily Momentum returns in Russell 2000

Source: S&P Global, Jackson Creek Investment Advisors

Next, we will shift to weekly returns. There have been five weeks so far in 2022 where MTM returns were greater than 2 standard deviations above or below the average (Z-score > +2 or < -2). This includes three consecutive weeks from the week ended June 24th through the week ended July 8th. The other two weeks occurred in March (week ended 3/18) and April (week ended 4/22). There have been only four entire years since 2000 where there have been more than five weeks with weekly MTM returns with a Z-score greater than +/- 2. Those years were 2000 & 2001 (Tech Bubble), 2009 (GFC), and 2020 (pandemic). There were several years with zero and the rest were below five.

Chart 2: No. of Weeks with MTM Greater than +/- 2 Standard Deviations

Number of weeks with MTM returns greater than or less than 2 standard deviations, 2000 - 2022

Source: S&P Global, Jackson Creek Investment Advisors

Below is the same chart we used when discussing Value returns last week. It shows the dispersion of daily MTM returns within the Russell 2000 by year. Here again, the interquartile range – the distance between the 25th and 75th quantiles – is the greatest in 23 years. Visually, it is the length from the bottom to the top of the colored boxes. As was true with Value, MTM is not only experiencing more volatility in returns but are also more positive. The median (black line) is about 0.50% in 2022 – more than double the previous high from 2000. The same is true with the average. The average and median may subside once we have a full year of data, but the wide dispersion will remain.

Chart 3: Daily Momentum Returns by Year

Daily momentum returns in Russell 2000 by year; 2000 - 2022, boxplot

Source: S&P Global, Jackson Creek Investment Advisors

With this short analysis, we hope to provide some more detail into factor returns. Comparisons to other periods are for historical perspective and understanding of the current environment. The click-bait title is for fans of B-rate movies.



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