From mid-2008 to mid-2009, momentum (aka relative strength) as a return factor was very much out of favor as the market experienced frequent leadership changes. One way to deal with such periods of underperformance is to change or tweak your model, as no doubt many did. However, those of us with an eye on the long-term results of momentum investing were well aware of the fact that momentum (as well as all long-term winning investment factors) goes through periods of underperformance. Sticking to the discipline has been heartily rewarded in 2010.
The chart below shows monthly cumulative performance of the seven different baskets of factors tracked by The Leuthold Group-specifically, it shows the “spread” of returns after grouping each factor into quintiles at the beginning of the time frame. The spread is the return for the first (best) quintile minus the return for the fifth (worst) quintile.
(Click to Enlarge)
Shown by permission from The Leuthold Group
The two obvious standouts are momentum (good) and growth (poor). Value ends up being fairly trendless in 2010. Given the historical tendency for momentum to enjoy multi-year periods of outperformance, we think that the next couple years could continue to be very favorable for momentum investing.
