What the momentum trade tells us about the stock market
Summary
Momentum stocks, which have been rising faster than the overall market, helped push stock prices up earlier this year. Recently, these stocks have started to lose value, especially after the Federal Reserve hinted it might raise interest rates.Key Facts
- Momentum stocks are shares that have increased and outperformed the market for about a year.
- A popular momentum ETF gained about 33% over the last 12 months, beating the S&P 500’s 20% gain.
- Chip and memory companies like Micron Technology, Intel, and AMD were among the top performers in momentum stocks.
- Since July, momentum stocks have performed poorly, with the iShares MTUM ETF dropping more than 11% at one point.
- The selloff started soon after the Federal Reserve, led by chairman Kevin Warsh, kept interest rates steady but signaled possible future increases.
- Rising short-term interest rates can disrupt momentum stocks, which often perform worse during these rate changes.
- The current market shift reflects broader economic uncertainties and changing Fed policies.
- Oil prices increased due to tensions with Iran, which affects inflation and may influence the Fed’s decisions.
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