President Donald Trump’s more measured tone on the trade war with China so far in September has unleashed a massive wave of selling in momentum stocks.
In other words, momentum names have no momentum because investors finally found some untapped value in value. Get it? It’s not really that complicated.
JPMorgan strategist Dubravko Lakos-Bujas points out that since Monday, momentum stocks have sold off a startling 10%. But the rotation out of the usually volatile sector actually began earlier this month.
Since September 1, some of the most surprising selloffs have come from high beta tech serve plays like Netflix (NFLX) (-2%), Crowdstrike (CRWD) (-14%), Okta (OKTA) (-15%) and Salesforce (CRM) (-2%). The iShares Edge MSCI USA Momentum Factor ETF — which tracks the performance of U.S.-focused momentum stocks — has dropped 0.1% in September compared to 3%-plus gains for the Dow Jones Industrial Average and S&P 500.
During the rotation this week alone, value stocks — often seen as such due to their rich dividends, low price-to-earnings ratios and general stability versus the broad market —have tacked on an impressive 7%.
Lakos-Bujas points out this was the largest three-day momentum/value rotations in over 30 years, triggered by a combination of better than expected economic data, monetary and fiscal stimulus, easing trade tensions (thanks Trump, and Chinese officials) and stabilization in the 10-year yield.
Even the beat-up small-cap Russell 2000 Index has caught a bid amid the rotation into value — it’s up a cool 5.5% month-to-date, according to Yahoo Finance data.
Lakos-Bujas says the sentiment shift in the markets is unlikely to change in the near-term. The thesis: Value became so unloved during a summer of escalating trade war headlines, there is more value to be found headed into year end.
“Despite significant rotation in the last few days, there is little sign of momentum capitulation so far. Positioning remains extreme compared to the last two years based on JPMorgan Prime data, and factor valuation spreads remain close to cycle highs. The correlation between Value and Momentum is near 30-year lows, signaling extremely oversold positioning for Value,” notes Lakos-Bujas.
Goldman Sachs is on board with a similar call.
“Looking forward, for Momentum to resume its outperformance, investors will need to either return quickly to the mindset of economic deceleration and recession risk, or wait until Momentum builds again in a form appropriate for an improved economic environment,” says Goldman Sachs strategist Ben Snider.