Muted Q4 Returns but Unusual Annual Returns

2025 Q4 & FY Small Cap Factor Review

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

Factor returns were generally underwhelming in the fourth quarter.

Value had the largest absolute return. Investors were more concerned about valuation levels as Value was positive. The most attractively valued stocks outperformed the least attractive by 8.26%, on average. This was the first quarter Value was positive since Q1. Due to poor performance in Q2 and Q3, Value is negative for the full year. Value’s 2025 return was -1.43%.

Volatility was lower, staying true to its inverse relationship with Value. The two factors had opposing returns in each quarter this year. The most volatile stocks underperformed the least volatile by 5.81% in the fourth quarter. This is after two consecutive quarters of higher Volatility. Volatility returned 2.24% for the full year.

Short-term momentum (STM) was mildly positive (+3.79%) as reversals were less frequent. Stocks that had outperformed the most over the previous four weeks tended to continue their outperformance during the subsequent week. STM was by far the worst performing factor during the year. Short-term momentum declined by 10.10% in 2025.

Medium-term momentum (MTM) was slightly negative. Stocks that had outperformed the most over the previous six months tended to underperform in the subsequent weeks. This was the second consecutive quarter of small negative returns to MTM and third of the year. The full year 2025 MTM spread was -2.48%.

Size was negligible in the fourth quarter. Capitalization did not influence investor decisions either way. Size was mildly positive for the full year, primarily due to a positive spread in the first quarter. Size returned 3.61% in 2025.

Small cap investors became more discerning in the quarter. Positive Value and negative Volatility points to a more risk-averse stance as many investors opted for greater certainty as opposed to the higher growth stocks that had previously propelled the market.

Factor Returns by Quarter & YTD

The following chart plots the daily cumulative returns for each factor for the past seven years. Each spread’s trajectory throughout the year is mostly linear with few major reversals or directional changes. The exception to that is Volatility, which we highlighted in previous quarters (read: High Volatility Continues to Rule the Day (and Market)). In the second quarter’s review (read: 2Q Small Cap Factor Review) we suggested Volatility could be setting up for a (rare) large positive annual return due to the large move in the second quarter. That did not pan out, however. Due to the factor’s negative start to the year and the fourth quarter decline, Volatility rose about 2% for the year. Despite a seemingly muted return, that equates to the fourth-highest return dating back to 2000. The three years that had higher returns were 2020 (+39.8%), 2003 (+31.3%), and 2009 (+24.4%).

Annual Volatility Line Chart

Value’s annual return of -1.43% is not too abnormal on the surface. Coincidently, though, it is the fourth-lowest annual return in our 26-year data history, and one of only five years where Value did not have a positive return. Similar to Volatility, the pandemic year of 2020 was one of the worst for Value (-19.3%). The other two worse years do not coincide with Volatility’s very strong years, though. The consecutive years of 2018 (-1.98%) and 2019 (-12.5%) were the other years with Value returns below 2025.

Annual Value Line Chart