Value stocks tend to lead small and mid-caps in January, BofA says

Investing.com -- Value stocks have historically outperformed other factor styles among U.S. small- and mid-cap equities in January, according to Bank of America’s equity and quant strategist Jill Carey Hall, who says recent market action is consistent with that seasonal pattern.

In a note on small- and mid-cap factors, Hall said November was “marked by reversals,” with risk-oriented factors such as high beta, price volatility and momentum lagging within the Russell 2000. 

In contrast, “Value factors, which have lagged YTD, were among the top performers,” led by high earnings yield and book-to-price, while high-quality stocks also outperformed after trailing earlier in the year.

BofA added that the shift has extended into December. Month to date through Dec. 18, “Value factors have been the best Russell 2000 performers, led by low P/E stocks,” with cash return and quality factors also outperforming. 

The bank added that continued weakness in momentum “can signal a leadership shift,” even as micro-cap stocks remain elevated after a strong rally.

Looking ahead, BofA stated that historical data point to value leadership at the start of the year. 

“Value has tended to be the best-performing small & mid cap factor group in Jan.,” the bank wrote, noting outperformance of 1.5 percentage points in small caps and 1.1 points in mid-caps versus long-term averages. 

By contrast, “Momentum was the worst style in both sizes” during January.

However, BofA cautioned that January performance is no longer a reliable signal for the full year, adding that recent decades show weaker evidence of a broader “January effect” for small caps overall.