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Momentum May Be Running Out Of Momentum

Russ Koesterich, CFA profile picture
Russ Koesterich, CFA

Russ discusses why momentum, which has thrashed value this year, could struggle in the second half.

Despite diminished expectations for growth and inflation, stocks enjoyed a stellar first half. While the latter half of 2016 was characterized by reflation, higher interest rates and a stronger U.S. dollar, the first half of 2017 witnessed decelerating inflation, modestly lower long-term rates and a collapse in the dollar. Nonetheless, investors merely shrugged and rotated into different parts of the market, notably healthcare and technology.

Along with the shift in sector and theme came a shift in style. Momentum came roaring back, after trailing value in the second half of 2016. Based on the USA MSCI Momentum and Value indexes, momentum thrashed value during the first six months of the year, 18% to barely 6%. However, in recent weeks, momentum has been stalling, raising the question of whether it can continue to lead the market. Although my colleague Richard Turnill still likes momentum, I'm a bit more of a skeptic. Here are two reasons why:

1. Momentum had a perfect environment in the first half of 2017.

Historically, momentum performs best in an environment of low and stable volatility - exactly the regime that has dominated this year. Although talk of reflation faded, low interest rates, a soft dollar and historically tight spreads kept financial conditions absurdly easy. In June, the Global Financial Stress Index hit its lowest level since late 2014. A lack of stress and easy money tend to support momentum investing. In this environment, it is best to follow Newton's First Law of Motion: An object in motion stays in motion.

2. This happy state of affairs will be difficult to maintain.

In order to maintain these idyllic conditions, the global economy will need to remain in a goldilocks state. In other words, an

This article was written by

Russ Koesterich, CFA profile picture
Russ Koesterich, CFA, JD, Managing Director and portfolio manager for BlackRock’s Global Allocation Fund, is a member of the Global Allocation team within BlackRock's Multi-Asset Strategies Group. He serves as a member of BlackRock's Americas Executive Committee. Mr. Koesterich's service with the firm dates back to 2005, including his years with Barclays Global Investors (BGI), which merged with BlackRock in 2009. He joined the BlackRock Global Allocation team in 2016 as Head of Asset Allocation and was named a portfolio manager of the Fund in 2017. Previously, he was BlackRock's Global Chief Investment Strategist and Chairman of the Investment Committee for the Model Portfolio Solutions business, and formerly served as the Global Head of Investment Strategy for scientific active equities and as senior portfolio manager in the US Market Neutral Group. Prior to joining BGI, Mr. Koesterich was the Chief North American Strategist at State Street Bank and Trust. He began his investment career at Instinet Research Partners where he occupied several positions in research, including Director of Investment Strategy for both U.S. and European research, and Equity Analyst. He is a frequent contributor to financials news media and the author of two books, including his most recent "The Ten Trillion Dollar Gamble."Mr. Koesterich earned a BA in history from Brandeis University, a JD from Boston College and an MBA from Columbia University. He is a CFA Charterholder.

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