After struggling in 2022, stocks exhibiting “quality” characteristics have led in 2023, according to new analysis from Morningstar Indexes based on Morningstar Global Factor Index returns. Meanwhile, the “low volatility” and “value” factors, which held up relatively well in the down market of 2022, have underperformed the broad equity market in 2023.
According to new Morningstar Indexes research, this change in market direction in 2023 has tripped up the momentum factor, which has been the best performing factor over the past 10 years. At its December 2022 reconstitution, the Morningstar Global Momentum Factor Index jettisoned stocks like Apple, Microsoft, Tesla and Nvidia because of a relative slowdown in their returns. All have gone on to become big winners in 2023, as the quality factor has led the market. Meanwhile, several of the momentum index’s top constituents – names like Exxon, Chevron and United Health – are in negative territory this year as value stocks have lagged.
Alex Bryan, Director of US Equity Products, Morningstar Indexes:
“Momentum investing is prone to underperformance after market inflection points. In chasing 2022’s winners, the momentum factor was left out of sync with a new market regime. Momentum is clearly a powerful force in markets, as its 10-year returns showcase. But factor leadership is always in flux. As we’ve seen, last year’s leaders can become this year’s laggards, and vice versa.”
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