This study aims to explore how the performance of momentum strategies varies across business cycles and economic crises, aiming to bridge theoretical models and practical asset pricing applications.
Using monthly US data from 1992 to 2024, the authors examine multiple momentum strategies, including traditional price-based (stock-on-stock) and real-sector-based (economic sector-on-stock) models. These strategies are analyzed across “UP” and “DOWN” phases of three business cycle indicators: Industrial Production, ISM Manufacturing and the S&P 500 index.
Momentum returns are significantly higher during economic UP states, especially under ISM uptrends. The 2–3 real-sector strategy yields average quarterly returns of 1.25% in UP states versus 0.33% in DOWN states, along with stronger Sharpe ratios. However, momentum performance deteriorates sharply during downturns and crisis periods, revealing fragility under economic stress.
The study focuses on US data and macroeconomic indicators; extensions to international contexts or firm-level fundamentals may offer additional insights.
The results emphasize the importance of adapting momentum strategies to macroeconomic conditions, helping practitioners align asset allocation decisions with real-sector signals.
Better-informed investment decisions can support more stable capital markets, especially during times of macroeconomic uncertainty.
This paper offers a novel momentum strategy framework that integrates real-sector dynamics with business cycle indicators, challenging static models such as the CAPM and extending the literature on state-dependent asset pricing.
