The Morningstar US Small Cap Index rose 7.6% since June 30 and is up 8.6% year to date, with market rotation to US small-cap stocks, according to new factor insight from Morningstar Indexes.
Amid increasing market volatility with growing concern about the US economy, anticipated interest rate cuts, earnings, and a looming US presidential election, the global index provider points out a number of recent shifts in its recent report: When Market Direction Changes, So Does Factor Leadership. In addition to the recent comeback for the size factor (i.e., smaller-cap stocks), low volatility and yield have also seen a resurgence in the third quarter. Quality and momentum, on the other hand, have fallen out of favor, after leading the market in the first half of the year. Momentum’s recent struggle is consistent with its tendency to underperform around market inflection points, when previous market conditions are less representative of the current environment.
Alex Bryan, CFA – Director of Equity Indexes Products, Morningstar Indexes:
“Whether the current resurgence in size, yield, and low-volatility factors represent a long-term shift or a short-term trend remains to be seen. History has shown that single factor investing requires patience and, sometimes, a strong stomach. Investors concerned about recent market dynamics should remember that factor cyclicality is a feature, not a bug. Investors looking to mitigate the risk of suffering through extended periods of underperformance may want to consider diversifying across factors.”
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