Why It’s Time to Buy Momentum Stocks

Why It’s Time to Buy Momentum Stocks

Momentum stocks have underperformed recently, but that may be about to change. This according to a recent article in Barron’s.

In 2021, the article reports, the momentum ETF has “gained just 6.5%, well behind the S&P 500’s 14% rise,” but adds that today’s “momentum basket” looks quite different composition, with financial stocks increasing from 1.6% to 32.5% and tech stocks falling from 41.1% to 17.9%.

“That shift has meant some major changes to the characteristics of the momentum basket,” the article argues, noting that high-momentum stocks are now slightly cheaper than low-momentum names, a scenario that, historically, has led to strong momentum returns for the following six to 12 months.

But the shift does come with a downside risk in the form of increased volatility for high-momentum stocks, the article notes. It cites comments from Wells Fargo equity strategist Christopher Harvey, who argues that the volatility should attenuate, in which case we can “expect to see multiple expansion for the group.” He notes that historically, the momentum basket’s “post-recession volatility decay” has been a protracted process that has boosted performance.

“If Harvey is correct,” the article concludes, “it could be a good time to buy momentum stocks on the dip. Just be ready for a wilder ride.”

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