Why Momentum Has Failed

 John CoumarianosMomentum is a strategy designed to profit from “herd behavior” – the tendency for high- (low-) performing stocks to continue to go up (down) as investor enthusiasm for them rises (declines). But as the recent regime changes between value and growth illustrate, momentum is unlikely to be successful in the long term.

Stock price trends can last a long time and then shift abruptly. And then they can enter a period of random back-and-forth, frustrating trend-followers who are waiting for the next longer-term move.

That’s why the momentum factor worked well in the aftermath of the financial crisis through the COVID-lockdown period when growth stocks thrived with nary a setback, but it has faltered since.

feast or famine

I tracked the two largest momentum funds, the $9.1bn iShares MSCI USA Momentum Factor ETF (MTUM) and the $1.1bn Invesco DWA Momentum ETF (PDP) from April 16, 2013 (the inception of the iShares fund) through the end of 2020 and then for the 2.5-year period from 2021 through June 30, 2023 when trends shifted, to show the discrepancy. (The Invesco fund began operations on March 1, 2007.)