Value: Don’t Call it a Comeback, it’s Been Here for Years

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Value: Don’t Call it a Comeback, it’s Been Here for Years

JOSH RUSSELL, PhD, CFA
Research Analyst

SEPTEMBER 11, 2019

Value and Momentum each had back to back extreme returns (five sigma) days on Monday September 9th and Tuesday September 10th. The Dow Jones Thematic Market Neutral Value Index (“Value”) started the week up 3.45%, its best day since inception on December 31st 2001. The Value Index followed this up on Tuesday September 10th with a 2.56% return, its 7th best day since inception. The Dow Jones Thematic Market Neutral Momentum Index (“Momentum”) was down 4.53% and 4.08%, its two worst days in the past 10 years (10th and 15th worst days since inception). Figure 1A shows the distribution of single day returns for the Value Index and Figure 1B shows the distribution of single day returns for the Momentum Index.

DISTRIBUTION OF MARKET NEUTRAL VALUE RETURNS 2002-PRESENT

Figure 1A: Distribution or daily returns for the Dow Jones Market Neutral Value Index.
Source: The Dow Jones Thematic Market Neutral Value Index, 12/31/2002 – 09/10/2019.

DISTRIBUTION OF MARKET NEUTRAL MOMENTUM RETURNS 2002-PRESENT

Figure 1B: Distribution or daily returns for the Dow Jones Market Neutral Momentum Index.
Source: The Dow Jones Thematic Market Neutral Momentum Index, 12/31/2002 – 09/10/2019.

Figure 2 shows us that it is normal for Momentum and Value to move in opposite directions. The red points mark the past two days’ observations. All but one of the points to the left of these are from the early part of the 2009 recovery – the last momentum crash. The orange ellipse contains points within two standard deviations of the mean and the purple ellipse contains 95% of the samples.

DAILY LONG/SHORT RETURNS SINCE 2002

Figure 2: Distribution of Daily Value and Momentum Returns.
Source: Dow Jones, 12/31/2002 – 09/10/2019.

It is an understatement to say that the recent factor moves are rare. This is the sort of thing that factor geeks wait decades for. The good news for those of us fitting that description is that these sorts of events tend to cluster. This is evident from Figure 3, which shows historic rolling 20-day returns for the two factor indexes. Figure 3, also shows us that sharp reversals in these factors are the norm. In fact, the worst day for Momentum was April 9, 2009 (down 7.56%). Seven market days later, on April 20, 2009 Momentum had its best day (up 10.35%)!

ROLLING 20-DAY LONG/SHORT FACTOR RETURN

Figure 3: Rolling 20-Day Value and Momentum Returns.
Source: Dow Jones, 12/31/2002 – 09/10/2019.

One last point, volatility in these indices is typically high around regime changes and big market moves. While a lot has changed recently (I would argue we entered a new regime in Q4 2018) the S&P 500 is up only 3% from where it was 12 months ago. It wouldn’t surprise me to see a few more large moves in Momentum and Value in the near future.

IMPORTANT INFORMATION

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