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Momentum led from wire-to-wire; High Vol meant low returns
All data in this post relates to the Jackson Creek small cap universe of stocks.
Medium-term momentum (MTM) was the leading factor in the Jackson Creek small cap universe (among our five key factors). MTM was very strong in the first and third quarters, propelling it to an annual decile one minus decile ten spread of 35%. The 2024 MTM spread was the third highest annual return since 2000 (see below).
Volatility was the worst factor during the year. This is not much of a surprise since Volatility has a negative expected return over most periods. The first and second quarters were the most challenging for the highest Volatility stocks. Volatility ended the year with a 26% decline. This marks the 19th year since 2000 where Volatility had a negative annual return. It is also the third out of the last four years (2023 was essentially flat).
Value had a positive year. The most attractively valued securities in our universe outperformed the least attractive by 19% during the year. Similar to MTM, the first and third quarters were favorable to Value stocks.
Short-term momentum (STM) had the largest spread in the fourth quarter, yet ended the year with the smallest spread (see second chart below). The fourth quarter was mostly influenced by near-term performance as those stocks that fared best in the prior four weeks tended to outperform in the subsequent week.
Size (Capitalization) ended the year positively, although Size is less influential as a factor within the small cap universe compared to larger capitalized indices.
2024 Factor Returns by Quarter
2024 Full Year Factor Returns
As we mentioned in previous quarterly factor updates (read: 2024 Q3 Small Cap Factor Review), factor returns tended to maintain their own paths throughout the year. That means the volatility of the spreads was low. There was also no meaningful changes in leadership or laggards. MTM lead the whole year while Volatility lagged the whole year.
Cumulative Daily Factor Returns 2019-2024
Factor correlations in 2024 were mostly inline with their long-term correlations in terms of direction, but their magnitudes were different. Value and MTM are slightly inversely correlated over the long-term, yet maintained a small positive correlation during 2024. Value and Volatility are also inversely correlated with a long-term coefficient of about -0.4. This year was -0.8, indicating how strongly those two factors' returns moved in different directions on a daily basis.
2024 Factor Correlations
MTM in 2024 was the third-highest spread we have seen in 25 years. The two other years with larger year-end MTM spreads were 2000 (orange line) and 2007 (grey). Interestingly, in those two years the Russell 2000 posted small declines. The index dropped -3.02% in 2000 and -1.57% in 2007. The Russell 2000 gained 11.54% this past year, bucking the trend of high MTM returns and negative index returns.
Medium-term Momentum Annual Returns
Value gained 19% in 2024 putting it in 10th place compared to the last quarter century.
Value Annual Returns
Volatility's 2024 spread of -26% makes it the 5th lowest return since 2000. The steep negative Volatility return coupled with a positive Russell 2000 is contrary to the four years with more negative returns. In 2000 (orange line) the Russell 2000 lost 3.02% (Volatility -75%); in 2022 (purple line) the index lost 20.44% (Vol -43%); in 2008 (brownish line) the index dropped 38.54% (Vol -34%), and in 2002 (dark green line) the Russell 2000 declined by 20.48% (Vol -28%).
Volatility Annual Returns
Factor returns can obviously vary from year-to-year, even quarter-to-quarter. Over the past six years we have seen four different factors have the best annual returns. Size lead in 2019; Volatility had a rare positive year in 2020 (due to the extreme nature of events in 2020!); Value was best in 2021-2023, and then MTM was #1 this past year.
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