Medium-term Momentum Dominates in Q1

2026 Q1 Small Cap Factor Review

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

Medium-term momentum (MTM) generated the largest spread in the first quarter. Stocks that had outperformed the most over the previous six months often outperformed in the subsequent weeks. The highest momentum stocks beat the lowest momentum stocks by 15.1%, on average, during the quarter.

Short-term momentum (STM) declined with the second-largest absolute spread. The most recent winners measured over the previous four weeks tended to reverse in the subsequent days during the quarter. STM declined 7.5%.

Divergent returns between MTM and STM is expected. Medium-term momentum measures over a longer period and has a positive expected return. Short-term momentum is measured over a shorter horizon and often captures sharp reversals and volatility.

Volatility declined in the first quarter. Investors favored stocks with greater price stability. This is an indication of a more risk-averse environment. The most volatile stocks underperformed the least volatile by 4.6%, on average.

Size was not a major contributor to returns. Larger companies outperformed smaller companies, on average, but the spread was only 1.5%. Size tends to be less influential in the Russell 2000 index than it is in the larger capitalization indices.

Value was negligible and thus not a material driver of returns. The spread between the average returns of the most attractively valued stocks and the least attractively valued was 0.77%.

Factor Returns - Q1 2026

The following chart plots the daily cumulative returns for each factor for the past seven full years plus the first quarter of 2026. As noted above, Medium-term momentum (MTM) produced a robust spread. The cumulative return followed a fairly steady outperformance of decile one versus decile 10, as opposed to a sharp increase over a short time. MTM’s 15.1% return is the second-highest first quarter return since 2000. The other Q1 with a higher return was just two years ago in 2024 (read 2024 Q1 Small Cap Factor Review) when the spread was 21.3%. MTM ended 2024 with the third-highest return since 2000.

Other factors with notable paths in the first quarter are Volatility and Value. The two factors had – unsurprisingly – inverse trajectories. The first month saw Volatility rise while Value declined. They both reverted and were mostly flat until the very end of the quarter when Volatility dropped and Value forged a small gain.

Cumulative Q1 Factor Returns 2019-2026

The next chart compares the first quarter (red line) with the annual returns since 2000. We can visually see how the first quarter’s strong start is only second to 2024 (slate blue). That year, MTM ended up 35%, behind 2007 (+44%) and 2000 (+43). In both of those latter years, MTM did not surge ahead until at least the middle of the year.

Annual MTM Line Chart

The histogram below shows another view of MTM’s first quarter return compared to all other quarters since the beginning of 2000. The red dot on the x-axis depicts Q1-26. It is in the “blue3” shaded area which represents +1 standard deviation above the average (dashed vertical line). This past quarter’s return ranks as the eighth-largest return of the 105 quarters since 2000.

MTM Histogram - All Quarters

Given the quarter’s undercurrents regarding geopolitical events, changing sentiment around growth themes and monetary policy, it is not a surprise that MTM had a strong return. When market anxiety rises, investors tend to lean on known performers. Thus, stocks that performed best over recent months are deemed more resilient and demand for their shares increases.

Medium-term momentum has a positive expected return, which was on display this quarter. However, there can be sudden and extreme reversals with this factor. The remainder of the year will reveal if this will be a banner year for MTM or if there will be a sharp pullback.

This blog is a general communication being provided for informational purposes only.  This information is in no way a solicitation or offer to sell securities or investment advisory services.  It is educational in nature and not to be taken as advice or a recommendation for any specific investment product or investment strategy.  This does not contain sufficient information to support an investment decision.  Any investment or investment strategy mentioned may not be suitable for all investors or in their best interest.   These opinions may not fit to your risk and return preferences.  All information is subject to change without notice.  Past performance is not necessarily indicative of future returns.  Readers are urged to check with their investment advisors before making any investment decisions.

Statistical information, quotes, charts, references to articles or any other quoted statement or statements regarding market or other financial information is obtained from sources which we believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All rights are reserved.  No part of this blog including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Jackson Creek Investment Advisors LLC.  Nothing contained herein constitutes financial, legal, tax, or other advice.   Please be advised to consult with your investment advisor, attorney, or tax professional before making any investment decisions.