April was a Risk-on month in terms of factor performance, although this appears to be reversing this month, demonstrating that volatility remains high. Momentum stocks continue to lag, while Value stocks were mixed last month, although they still lead Growth stocks, report analysts at Bank of America Merrill Lynch.

A risk-on performance in April

Strategist Savita Subramanian and team said in their report that the markets posted “modest” gains last month with Risk-on factors extending their run. They’re up 6.8% year to date, which is the biggest gain of any factor group. Among the risk-on factors, High Earnings Per Share Estimate Dispersion saw the biggest gain at 15.2% in April. Year to date, the sub-factor has gained 22% thanks to its exposure to the Energy and Materials sectors. The two sectors were April’s top performers.

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Other outperforming sub-factors within risk-on were Low Price, which climbed 7.9%, and High Beta, which gained 3.1% during the month of April. BAML adds that their Small Size factor climbed 6.1% in April to become the second best performing factor so far this year with a 17% gain.

Momentum and Growth lag, Value mixed

The firm’s strategists add that Momentum factors continue to lag, with all of the one they track underperforming the index in April. Momentum has fallen 0.8% so far this year, making it the year’s worst-performing factor. Subramanian and team said long-term Momentum factors are struggling the most, adding that they see continued risks to this factor due to crowded positioning and stretched multiples, especially if volatility picks up in the second half of the year.

Value factors edged higher by 0.3% in April as Low Price/ Book led the way with a 7.2% gain while High Free Cash Flow/ Enterprise Value lagged the rest of the group with a 4% decline.

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Overall, the BAML team said most Growth factors lagged the index as only Earnings Per Share Surprise beat it with a 2.8% gain. So far this year, Value factors have gained 3.1% and are still ahead of Growth, which has declined 0.5%. The BAML team expects this trend to continue.

Yet another reversal in May

Subramanian and team suggest that this year may end up being “the year of reversals” as the first quarter brought one of the biggest reversals ever recorded. This month has brought its own share of reversals as well, they add, Momentum and Growth have both outperformed, gaining 0.5% and 0.3% respectively, with long-term Momentum and secular Growth stocks leading the way. Further, Risk factors, which had done the best before this month, have lagged the index by declining 2.8% this month, although Value has posted the worst performance with a 3.3% decline.

However, the BAML team noted that there is one trend that has been consistent this year, which is that the most neglected stocks have outperformed crowded stocks. Year to date, the ten stocks that fund managers are the most underweight on have outperformed the ten stocks they are the most overweight on by 12 percentage points. So far this month, they’ve outperformed by two percentage points.

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When low beta is high beta

They added that although low beta stocks lagged last month, they’ve outperformed year to date. In fact, these stocks are trading at their highest valuations against high beta stocks that BAML strategists have ever observed. They said low beta stocks are moving in tandem with inflows to low volatility exchange-traded funds.

Subramanian and team warn that many investors may be equating low beta with “safety” because many of these stocks carry high leverage ratios with major earnings volatility. Further, they noted that low beta stocks’ realized volatility has been steadily increasing for years, which they suggest means that low volatility is becoming high volatility.

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