Markets, momentum, meltdowns…a lot of M’s in this week’s What in the World? !  

Consonants aside, July was a fascinating month, to say the least. From the memo of (mis)understanding to the Kospi ‘Krashing,’ and the ‘will they or won’t they’ fed rate-hike nonsense, there has been no shortage of things to write about.  

But maybe the thing that stood out most this past week was the complete and utter carnage in the momentum space. Depending on which index or ETF you look at, July will go down as one of—if not the—worst months ever for momentum: the tendency for assets that have been rising or falling to continue moving in the same direction.  

For our purposes, we’re looking at the Goldman Sachs US High Beta Momentum Index as a proxy for the recent clobbering.  

The drawdown is north of 30%, putting it right in line with the index’s worst monthly drawdown ever, worse even than during the Global Financial Crisis. We have to go all the way back to the tech bubble to find anything in the ballpark of what we’ve just witnessed.  

This sell-off has largely been driven by investors reassessing valuations and moving away from the technology stocks that had led the market. Concerns that AI spending may be unsustainable, or take longer to generate profits, have hit AI and semiconductor names especially hard. With roughly half of the S&P 500’s market cap tied to AI-related companies, that concentration has led to increased volatility.  

July’s Monumental Drawdown 

While a drawdown of this magnitude is psychologically painful, not to mention the real capital losses, it’s also mathematically punishing. As we know, a 30–40% loss does not simply require a 30–40% gain to break even. Nope, it’s quite a bit more painful than that. A loss of that size requires a gain of roughly 43–67% just to get back to where you started before the loss. 

Taking the elevator down from the 50th floor is not only convenient, but far preferable to taking the stairs. However, not everything in life translates to financial markets. When investing, ‘tis best to avoid the elevator.  

Until next time.  

DEFINITIONS

Momentum is the tendency of a financial asset’s recent price trend to persist. Positive momentum refers to a recent upward trend, while negative momentum refers to a recent downward trend. 

The Goldman Sachs US High Beta Momentum Index (often tracked as a proprietary institutional trading basket or factor model) is a quantitative equity strategy that goes long recent market winners (high-performing stocks with high beta) and short recent market losers. Extra weighting has been given to the outliers over the last month. It is not possible to invest directly in an index. 

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization. Further information may be found at S&P Dow Jones Indices. It is not possible to invest directly in an index. 

Beta is a measure of how much a stock or fund moves relative to the overall market. A beta of 1.0 means it moves in line with the market; above 1.0 means it tends to swing more; below 1.0 means it tends to move less. A beta of -1.0 would mean it moves in the opposite direction. 

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