July’s Momentum Pullback

If July were to end here, this would rank as momentum’s worst month since the sharp reversals of 2009 and 2000.

Where do we go from here?

History provides a useful framework for thinking about what has typically followed. Looking at US equities back to 1986 where momentum underperformed by more than 5 percentage points, in the subsequent 1-year periods, momentum outperformed 77% of the time and by an average of more than 4 percentage points. Over the subsequent 3-year periods, momentum outperformed 85% of the time, averaging roughly 30 percentage points of cumulative excess return.

While every market cycle is different, these sharp reversals have often marked periods of opportunity.

This material is for informational and educational purposes only and does not constitute investment advice, a recommendation, an offer to sell, or a solicitation of an offer to buy any securities or investment products. Past performance is not indicative of future results. There can be no assurance that any investment strategy, including momentum strategies, will achieve its objectives or avoid substantial losses. Markets can and do reverse sharply, and historical patterns of momentum underperformance followed by subsequent outperformance may not repeat. Any references to historical periods in which momentum underperformed by more than 5 percentage points, and the subsequent 1-year or 3-year excess returns, are based on historical data analysis. Such analysis may involve backtested or hypothetical results that do not represent actual trading. Backtested performance has limitations, including the benefit of hindsight, and does not reflect the impact of material economic and market factors, trading costs, liquidity constraints, or investor behavior. Actual results may differ. Investors should consult their own advisors regarding their specific situations.