2024 Q2 Factor Review

Factors maintain their trajectories

Four of our five key factor spreads were directionally similar to the first quarter. Those same four factors generated smaller spreads compared to Q1. Short-term momentum (STM) went from a decline during Q1 to a positive return in Q2. Volatility had the largest absolute move in the second quarter with a 9% decline. Medium-term momentum (MTM) went from the largest mover in Q1 to the smallest spread in Q2.

The cumulative path of returns was generally a continuation from the first quarter. Despite the significant reduction in MTM's quarterly return, it was still the dominant factor in the first half of 2024. MTM is up 23% year-to-date. Volatility continued its negative slide. The Decile 1 minus Decile 10 spread is -23%.

Despite Volatility and MTM going in different directions, they were not the most inversely correlated factors during the first half of 2024. Value and Volatility were very negatively correlated. There are only 124 data points, but the relationship was strong. Value and MTM were also positively correlated which is counter to their long-term relationship being non-correlated to negatively correlated.

2024 Daily Correlation Matrix

Source: S&P Global; Jackson Creek Investment Advisors

The most volatile stocks (decile 1) underperformed the least volatile (decile 10) by 8.7%. YTD, Volatility has declined 23%. The negative Volatility spread in the first half of 2024 ranks as the fourth-lowest since 2000. The three years that had lower 1H spreads were 2022 (slate blue line), 2000 (orange), and 2002 (green).

Although the first six months does not predict what will happen in the next six, we can see that 2000 saw the largest annual decline for Volatility; 2022 was the second-worst; and 2002 was the fourth-worst. Does this mean 2024 will rank among the worst years for Volatility? We will not know for sure until December.