{"id":73451,"date":"2023-10-17T02:54:17","date_gmt":"2023-10-17T06:54:17","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/when-momentum-loses-momentum-seeking-alpha\/"},"modified":"2023-10-17T02:54:23","modified_gmt":"2023-10-17T06:54:23","slug":"when-momentum-loses-momentum-seeking-alpha","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=73451","title":{"rendered":"When Momentum Loses Momentum | Seeking Alpha"},"content":{"rendered":"
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By Andrew Ang, PhD<\/em><\/p>\n

Originally published on September 29, 2023<\/em><\/p>\n

When Momentum Loses Momentum<\/h2>\n

There\u2019s no way to sugarcoat it \u2013 the momentum factor\u2019s performance in 2023 has been horrible. In fact, January 2023 was the worst month for momentum since April 2009.<\/span>1<\/sup><\/p>\n

Poor performance for the momentum factor has led some investors to question its existence and naysayers to come out of hiding to voice their \u201canti-momentum\u201d views (where were the naysayers in 2022?).<\/p>\n

Staying disciplined and focusing on long-term goals can often be the best medicine when any factor falls out of favor.<\/p>\n

For \u201cfactor believers\u201d (which unashamedly includes myself!) who have looked at the empirical evidence surrounding factors like momentum, 2023 is an unfortunate, but not unexpected, outcome of being a factor investor.<\/p>\n

Sometimes the factor you believe in is challenged \u2013 there are long-term premiums for factors precisely because investors sometimes have to endure short-term losses. In 2023, that factor has been momentum.<\/span><\/p>\n

A better reward-to-risk ratio than stocks<\/h2>\n

It\u2019s important to take a step back from the short-term noise and challenges for momentum and look at the longer-term evidence. Momentum has had better reward-to-risk ratios than other well-established factors like value, size, and quality.<\/p>\n

Furthermore, momentum\u2019s reward-to-risk ratio has actually been larger than the equity premium itself.<\/p>\n

Exhibit 1: Annualized Reward-to-Risk Ratios<\/strong><\/p>\n

\"Annualized<\/p>\n

Source: Ken French Data Library. Data from July 1963 \u2013 July 2023. Equity premium calculated as Mkt-Rf. Size premium calculated as SMB (small minus big). Value premium calculated as HML (high BTM minus low BTM). Quality premium calculated as RMW (robust minus weak). Momentum calculated as Mom (high prior minus low prior). The reward-to-risk ratio for each factor is the average factor return over this period divided by its standard deviation, annualized by multiplying by the square root of 12.<\/p>\n

Using over 60 years of monthly data, the momentum reward-to-risk ratio has been almost double the size premium and 1.5 times the value premium. Thus, in historical returns, there is strong evidence of a momentum premium.<\/p>\n

Momentum losses<\/h2>\n

It is worthwhile to remember that while momentum has underperformed in 2023, it has done so in an environment of positive market returns.<\/p>\n

This pattern is not unique to 2023: the worst 10 momentum losses since 1963 have occurred during months where the market return was positive.2<\/sup><\/p>\n

In the worst 10 momentum losses, the winner stocks experience close to zero or positive returns – it is only in the 11th<\/sup> worst loss, during March 1980, that the portfolio of winning stocks exhibited negative returns.3<\/sup><\/p>\n

Exhibit 2: Worst 12 One-Month Momentum Losses<\/strong><\/p>\n

<\/span><\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
<\/td>\n <\/td>\nMonthly returns (%)<\/strong><\/td>\n<\/tr>\n
Rank<\/td>\nMonth<\/td>\nMOM Factor<\/td>\nWinners<\/td>\nLosers<\/td>\nMarket<\/td>\n<\/tr>\n
<\/td>\n <\/td>\n <\/td>\n <\/td>\n <\/td>\n <\/td>\n<\/tr>\n
Worst 1<\/td>\nApril 2009<\/td>\n-34.3<\/td>\n5.7<\/td>\n40.0<\/td>\n10.2<\/td>\n<\/tr>\n
2<\/td>\nJanuary 2001<\/td>\n-25.3<\/td>\n-0.8<\/td>\n24.5<\/td>\n3.7<\/td>\n<\/tr>\n
3<\/td>\nNovember 2002<\/td>\n-16.3<\/td>\n1.0<\/td>\n17.4<\/td>\n6.1<\/td>\n<\/tr>\n
4<\/td>\nJanuary 2023<\/td>\n-16.0<\/td>\n2.8<\/td>\n18.8<\/td>\n7.0<\/td>\n<\/tr>\n
5<\/td>\nJanuary 1975<\/td>\n-13.8<\/td>\n14.9<\/td>\n28.7<\/td>\n14.2<\/td>\n<\/tr>\n
6<\/td>\nMay 2009<\/td>\n-12.5<\/td>\n2.2<\/td>\n14.6<\/td>\n5.2<\/td>\n<\/tr>\n
7<\/td>\nNovember 2020<\/td>\n-12.4<\/td>\n14.1<\/td>\n26.5<\/td>\n12.5<\/td>\n<\/tr>\n
8<\/td>\nMarch 2009<\/td>\n-11.9<\/td>\n6.8<\/td>\n18.6<\/td>\n9.0<\/td>\n<\/tr>\n
9<\/td>\nJuly 1973<\/td>\n-11.6<\/td>\n4.9<\/td>\n16.5<\/td>\n5.7<\/td>\n<\/tr>\n
10<\/td>\nMay 2003<\/td>\n-10.7<\/td>\n5.8<\/td>\n16.5<\/td>\n6.1<\/td>\n<\/tr>\n
11<\/td>\nMarch 1980<\/td>\n-9.6<\/td>\n-18.8<\/td>\n-9.3<\/td>\n-11.7<\/td>\n<\/tr>\n
12<\/td>\nApril 2003<\/td>\n-9.3<\/td>\n6.3<\/td>\n15.6<\/td>\n8.3<\/td>\n<\/tr>\n<\/table>\n

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