2024 Q3 Small Cap Factor Review

Momentum maintains the lead in the 2024 factor race

All data in this post relates to the Jackson Creek small cap universe of stocks.

Factor returns mimicked the first quarter in terms of direction. MTM was most positive, followed by Value and Size. Short-term momentum (STM) and Volatility were negative. STM was the most negative in the third quarter compared to Volatility lagging the most in Q1.

Medium-term momentum (MTM) reclaims the top spot for quarterly factor returns. MTM had +11.0% spread in the third quarter and is up +36% year-to-date (2nd chart).

Volatility has had a negative spread each quarter this year. The magnitude of the negative returns has been diminishing. Volatility was down over 15% in Q1, down 9% in Q2 and down 2.7% in Q3. That makes Volatility’s year-to-date return -25.5%.

Value has been positive each quarter this year and is up 19.6% year-to-date.

STM was negative again after generating a positive spread in Q2. STM is down 5.6% for the year.

Size was flat during the quarter and has a 14.4% year-to-date return.

2024 Factor Returns by Quarter

2024 Year-to-date Factor Returns

Factor returns continue to forge their own path without any real disruption from trends started in January. The exception to that could be MTM. Medium-term momentum had a strong start to the year, levelled off during Q2, and even had a short reversal in the beginning of Q3. Since that brief reversal, MTM had a positive trend through the end of Q3. There were short-lived gyrations among each of the factors. For the most part, they continued their trajectories from Q1.

Factor Returns Through First Nine Months 2019-2024

In the second quarter factor update (read: 2024 Q2 Factor Review) we highlighted Volatility. For Q3, MTM gets the spotlight. As mentioned earlier, MTM is up 36% in 2024. Through the first nine months of the year, MTM is at it’s highest D1-D10 spread in our data history. There are two other years since 2000 where MTM finished the year with a more positive spread than where it currently is in 2024. Those years were 2000 (orange line) and 2007 (grey).

Interestingly, in those two years when MTM soared, the Russell 2000 had a negative annual return after being positive at the end of the third quarter. As of the end of Q3 in 2000, the Russell 2000 was up 4.2% before ending the year down 3.0%. In 2007, the Russell 2000 was up 3.2% after nine months before finishing the year down 1.6%. As of September 30th of this year, the Russell 2000 is up 11.2%. Will we see a market decline in the final months as MTM gains? Time will tell.

Medium-term Momentum Annual Returns

Medium-term momentum’s run this year has been closely correlated with Size. Size has not seen the same outsized returns as MTM, but their daily returns have moved similarly, indicated by the .77 correlation coefficient. The other strong correlation is the inverse relationship between Value and Volatility. During the first nine months of the year they have a correlation coefficient of -.78. We have written about this dynamic before (read 2023 Small Cap Factor Review), but this year is really living up to that billing.

2024 Factor Correlations During First Nine Months

This year's factor returns have been mostly consistent. Market returns in general have been influenced by interest rate expectations. With the Federal Reserve finally beginning to lower interest rates and the upcoming presidential election, we will have to see how the fourth quarter plays out.