The following is what we observed (Chart 1), and what it tells us about Momentum, Value, and Quality in volatile markets:
- Momentum held up because it had already rotated into defensive stocks
- Value performed, but thanks to energy and utilities, not cheapness
- Quality lagged as many high-quality stocks still carried interest rate or market risk
Chart 1. Israel-Iran conflict factor style skyline
In systematic strategies like enhanced indexing, investors knowing what they truly own – and how it’s positioned – is critical to navigating risk.
Factors aren’t static. Their behavior reflects not just economic conditions but also investor positioning and sentiment. By looking under the hood, we believe investors can better prepare their portfolios for the next surprise and not just react to shocks but also anticipate how style exposures will respond.
Key style insights
The following provides several important dynamics among investment styles and factors:
Low beta vs. High beta
In response to the Israeli attack on Iran on June 13, low beta stocks (e.g., consumer staples, utilities, etc.) outperformed strongly, while high-beta stocks sold off.
Why? Investors sought safety in stable, lower-volatility names. Once hopes for a ceasefire rose, the pattern reversed, and high-beta names bounced back.
The takeaway
Fear trading = long low beta and short high beta, while relief trading meant the opposite.
Momentum surprises
Typically, a sudden shock breaks the momentum factor (as yesterday’s momentum leaders crash and laggards soar). Yet momentum strategies delivered positive returns, especially on June 13.
Why? Recent momentum had rotated into defensive names before the conflict. For months, uncertainty has been the new normal, so traders were riding trends in low beta stocks. So, when the news of the bombing occurred, those trends accelerated instead of reversing.
The takeaway
This underscores how momentum is context-dependent, and in this case, its winners were the market’s defensive stalwarts.
Value’s sector secret
Value stocks, often seen as cyclical and riskier, performed well at the start of the crisis, but not because investors suddenly developed an appetite for cheap stocks. Its outperformance came largely from sector exposure, particularly to Energy and Utilities. Strip those sectors out, and Value wouldn’t have looked so defensive.
Why? Many value names in sectors, such as Energy and Utilities, benefited from surging oil and a flight to safety. In our factor decomposition, dividend yield and other value metrics were significant positive contributors on June 13.
Vs. growth
Growth stocks, however, especially high-growth tech, underperformed, which is often due to their longer duration and tendency to be sold off as yields and risk aversion spike.
When tensions subsided, growth resumed. News of a potential ceasefire broke on June 24, and markets reacted rapidly: oil prices fell, high beta and cyclicals rebounded, while defensive stocks lagged. Factor exposures reversed just as quickly, the short book rallied, and prior defensive longs faded. It was a textbook risk-on relief rally (Chart 2).
Chart 2. Israel-Iran conflict factor daily returns
The takeaway
Value’s behavior isn’t always about valuation; it’s often about what’s inside: its sector mix (oil and utilities). How you define your factors and whether they are sector-neutral can have a significant impact on returns.
Quality not always a safe haven
Quality stocks, or companies with strong balance sheets, stable earnings, high return on equity, etc., saw mediocre performance in the initial shock.
Why? Many quality companies – think big tech or premium consumer brands – still carry market risk. Plus, quality isn’t the same as low beta. Investors can be attracted to a high-quality business, but it may still be cyclical or sensitive to interest rates.
The takeaway
In crisis mode, quality wasn’t a primary focus; instead, investors prioritized explicitly low-risk factors, such as low beta and dividend yield.
So, what’s the big picture?
During extreme events, whether geopolitical, social, or environmental, markets tend to behave in a playbook-like fashion, albeit with some twists that reflect the current times. In this case, a few conclusions:
Composition matters
Broad labels like value or growth may be misleading. However, within value, for example, the sector composition (energy, utilities, etc.) was critical to its success in this conflict. Understanding why a factor behaves a certain way (e.g., value performance hinged on oil prices) is crucial. Investors need to know what they truly own beneath the surface of the factors.
Momentum and positioning
The fact that momentum didn’t break reveals a great deal about market positioning before the conflict. It appears that many were already in defensive positions before the missiles were launched. When one extreme tail risk follows another, the market’s earlier positioning can either soften or intensify the impact on factors. In this case, it softened the blow with momentum, having already moved to safer names, which helped it withstand the storm.
Final thoughts
Markets will always have surprises. However, by delving into the behavior of styles and factors, we aim to stay one step ahead, positioning our portfolios to withstand shocks and seize opportunities. There’s often a lot more going on, and as investors, it pays to pay attention.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed, and actual events or results may differ materially.
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