The best performing stocks are generally not the safest. They are now.

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When you are worried, you usually do not try to be quick. However, investor concerns over a recession have contributed to the success of investments. Do not expect it to stay that way.

Momentum's actions are often seen as top-flight lottery tickets, actions that have the potential to make – or lose – investors a lot of money very quickly. Quantitative Wall Street investors have a different way of looking at dynamics. In simple terms, it is a basket of the best performing stocks over a given period. The assumption is that these stocks, as a group, will continue to outperform, until they do not.

But the momentum factor acts strangely. Normally, the high-dynamic basket is a mix of different styles and factors, but its correlation with low-volatility stocks has increased in recent months, he writes. Joseph Mezrich, responsible for quantitative equity strategies at Nomura Instinet. At the same time,
Russell 1000's
the worst performing stocks – the low-momentum basket – have moved in tandem with high-volatility stocks. Better still, a neutral sector strategy that favors high-dynamic stocks and relies on low-dynamic stocks would have generated 27% of equities between early May and August 27th. , something that does not happen very often – just in two months since 2000, in September 2002 and in June 2008. "The current experience would seem to indicate a high level of anxiety associated with the stock price ", Writes Mezrich.

Read more: Betting on the winning shares still works – for the moment

After the 2002 proceeding, the
S & P 500
rose 22% over the next 12 months, but after the 2008 event, the S & P 500 dropped 28% over the same period. These statistics do not help much, but they confirm what many investors have felt: we are at a time when it is almost impossible to say what direction the market will take. "Out-of-the-box performance can be followed by significant positive or negative returns in the market," writes Mezrich.

Wall Street strategists can not agree. Each day, a new note is issued that hammers the table one way or the other. "We believe that time will prove that the consolidation of the month of August constitutes a configuration for a major gathering of shares" in the second half of 2019, Tom Lee from Fundstrat written in a note on Tuesday, representing the bulls. Masanari Takada from Nomura, meanwhile, recently predicted a Lehman Brothers collapse.

One thing we know is that, whether the market goes up or down, low volatility, at least overall, will probably not be a good place to be. The reason: evaluation. Five years ago, the S & P 500 Low Volatility Index was trading at 18.3 times the gains of the last 12 months, very close to the index
S & P 500
18.2 times. The low volatility index now trades at 23.3 times net profit, four points higher than the S & P 500, 19.3 times.

High valuations do not mean that the low volatility factor can not work, but it will probably not offer much protection if it is applied to the market as a whole. "Low Volatility stocks performed well as volatility increased, but given the very high multiples of these equities in the US, we think the usual simple definitions of" low volatility (or minimum variance) are too expensive. to be defensive, Bernstein strategists, including Inigo Fraser-Jenkins and Sarah McCarthy, to write. "If investors are looking for low-volatility exposure, we think they should be more focused on trading globally and within sectors. On this basis, no significant premium is required. "

As for the dynamics, it is also expensive – too expensive, writes McCarthy, Bernstein. Momentum shares were closely linked not only to low volatility, but also to lower bond yields. If yields stop falling, the momentum could be a victim. "From these excess valuations, these stocks are vulnerable to a change in macroeconomic trends, such as stabilizing returns," McCarthy writes. Momentum hates a change of trend.

McCarthy recommends investors who want to keep their momentum from holding both high-growth and dynamic stocks. These include
Microsoft

(MSFT)
Starbucks

(SBUX) and
Ulta Beauty

(ULTA).

Write to Ben Levisohn at [email protected]