- Positive news about a COVID-19 vaccine on Nov. 9 caused sharp moves in markets and factors. Factors that had been hit hardest during the pandemic jumped, while those that had performed well, such as momentum, slumped.
- The MSCI Factor Crowding Model had shown high overall levels of crowding in the momentum factor, driven by high valuations of high-momentum stocks, since early April.
- More recently, since October, we observed unusually high levels of shorting in high-momentum stocks, potentially indicating a large group of investors believed the wings of the high flyers would soon melt.
Positive news about a COVID-19 vaccine on Nov. 9 caused sharp moves in markets and factors. Industry and style factors that had been hit hardest during the pandemic, such as consumer services, airlines, restaurants, management quality and dividend yield jumped, while those that had performed well, such as semiconductors, household durables, profitability and momentum, slumped. Did this mark new leadership in factors and start a long-awaited rotation from momentum to value, or was it simply temporary turbulence?
The exhibit below displays performance of style and industry factors in the MSCI Barra Total Market Model for Long-Term Investors (USSLOW) from Feb. 24 through Nov. 6, as well as for Nov. 9.
Performance of US Style and Industry Factors Before and on the Day of Positive Vaccine News
In just one day the momentum factor lost nearly 5% and wiped out most of its gains from the previous nine months. In addition, as of Nov. 6, 2020, the MSCI Factor Crowding Model showed elevated levels of crowding in the momentum and residual-volatility factors, the two best-performing style factors over the previous nine months. Crowding in both factors was driven by the valuation component, as the exhibit below shows. We also see in this exhibit that the value and earnings-yield factors continued to have very negative crowding scores, indicating they were out of favor with investors, as we have noted in the past.
The Big Short?
While the overall crowding score for momentum was high, the short-interest component provided a large negative contribution to the score. This indicates that, compared to historical norms, high-momentum stocks were being shorted to a greater extent than low-momentum stocks. This suggests to us that there may have been a substantial pool of investors who believed the high flyers had finally flown too close to the sun and there would be a drawdown in the momentum factor.
US Factor-Crowding Scores as of the Friday Before the Vaccine News
As of Nov. 6, 2020.
We saw a similar pattern in the size factor — the large positive contribution of the valuation component indicated that large-cap stocks were unusually expensive relative to small caps, compared to their historical average. And the large negative contribution of the short-interest component indicated large caps were being shorted much more than small caps, compared to historical norms, suggesting many investors were looking for small-cap stocks to shine relative to large caps.
Looking at the evolution of crowding scores for momentum in the exhibit below, we see that short interest in the momentum factor actually had been building since early July and reached more than three standard deviations beyond its historical mean in early October.
MSCI Factor Crowding Model Scores for US Momentum Through the Friday Before the Vaccine News
Data from Jan. 1 through Nov. 6, 2020.
2020 has been an extraordinary year in many respects, including factor performance. With definitive positive news on a vaccine for COVID-19 on Nov. 9, we saw a dramatic shift in factor performance that some appear to have been anticipating for several months.