Momentum Rolls On

Both 2017 and the first half of 2018 have been marked by the strong relative performance of price momentum strategies. The outperformance of price momentum factors over this 18-month period has reached historically high levels, suggesting that a reversion to the mean may be in the offing in coming quarters.

The MSCI USA Momentum Index is based on the MSCI USA Index, which consists of large cap and midcap stocks in the U.S. market. The Momentum Index is designed to reflect the performance of an equity momentum strategy by emphasizing those stocks with high price momentum. This Index underperformed the S&P 500 by 6.8% in 2016, but then outperformed in 2017 by 16.0% and outperformed again in the first half of this year for a cumulative excess return over the past 18 months of 22.5%.

Rolling 18-Month Relative Return: Momentum Index 1 vs. S&P 500

Data from 4/30/1983 - 6/30/2018

The MSCI USA Momentum Index is based on the MSCI USA Index, which consists of large cap and midcap stocks in the U.S. market. The Momentum Index is designed to reflect the performance of an equity momentum strategy by emphasizing those stocks with high price momentum.

Source: Bloomberg, MSCI

The chart above illustrates how this past 18 months of excess return compares with history. As the chart illustrates, the relative performance of momentum is cyclical. As momentum strategies focus on recent stock market winners, they attract new investors who buy those same stocks, creating an upward cycle for the strategy. However, eventually the cycle reverses, perhaps due to valuation concerns, disappointing earnings or some other new development. The more investors who are on the momentum train at the time, the more severe the reversal in trend tends to be. 

The past 18-month excess return of 22.5% for momentum ranks among the highest in the past 35+ years. All of these past periods were followed eventually by significant underperformance of momentum stocks, most notably in the period following the Tech bubble of 1999 and early 2000. 

We believe that Momentum factors can be effective in stock selection and can add value over time. Given the unusually strong returns from Momentum over the past year and a half, however, it may prove beneficial for investors to ensure that they have exposure to other characteristics in their portfolios as well, such as good valuation, high quality and strong fundamentals.

The preceding Market Update reflects the thoughts of Renaissance as of July 1, 2018. This information has been provided by Renaissance Investment Management. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision. The views and opinions expressed are those of the portfolio manager at the time of publication and are subject to change. There is no guarantee that these views will come to pass. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing.


If Renaissance or benchmark performance is shown, it represents historically achieved results, and is no guarantee of future performance. Future investments may be made under materially different economic conditions, in different securities and using different investment strategies and these differences may have a significant effect on the results portrayed. Each of these material market or economic conditions may or may not be repeated. Therefore, there may be sharp differences between the benchmark or Renaissance performance shown and the actual performance results achieved by any particular client. Benchmark results are shown for comparison purposes only. The benchmark presented represents unmanaged portfolios whose characteristics differ from the composite portfolios; however, they tend to represent the investment environment existing during the time periods shown. The benchmark cannot be invested in directly. The returns of the benchmark do not include any transaction costs, management fees or other costs. The holdings of the client portfolios in our composites may differ significantly from the securities that comprise the benchmark shown. The benchmark has been selected to represent what Renaissance believes is an appropriate benchmark with which to compare the composite performance.

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MSCI Data:

The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.

S&P Data:

S&P is the source and owner of the trademarks, service marks and copyrights related to the S&P Indexes. S&P® is a trademark of S&P. This presentation may contain proprietary S&P data and unauthorized use, disclosure, copying, dissemination or redistribution is strictly prohibited. This is a presentation of Renaissance Investment Management. S&P is not responsible for the formatting or configuration of this material or for any inaccuracy in Renaissance’s presentation thereof. This data is to be used for the recipient’s internal use only.

Referenced Indices:

S&P 500 Index—The S&P 500 Index consists of 500 stocks chosen for market size, liquidity and industry group representation. It is a market-value weighted index (stock price times number of shares outstanding), with each stock’s weight in the Index proportionate to its market value. It is calculated by Standard & Poor’s Corporation, and reflects reinvestment of all dividends and capital gains.

MSCI USA Momentum Index—The MSCI USA Momentum Index is based on the MSCI USA Index, which consists of large cap and midcap stocks in the U.S. market. The Momentum Index is designed to reflect the performance of an equity momentum strategy by emphasizing those stocks with high price momentum.

MSCI USA Index—The MSCI USA Index is designed to measure the performance of the large and mid-cap segments of the U.S. market. The index consists of approximately 630 securities and covers 85% of the float adjusted market capitalization in the U.S.


PUBLISHED: August 15, 2018

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