We construct firm fundamental indexes to summarize a firm’s broad range of business activities, and show that firms experience fundamental cycles similar to the business cycles of the aggregate economy. We find that momentum and long-term reversal are manifestation of the different stages of firm fundamental cycles. In addition, a fundamental-based factor explains factor momentum, and adding it into the Fama and French (2015) five-factor model, raises the fraction of anomalies explained from 37% to 80% out of a comprehensive set of 247. Our evidence shows that it is economic forces rather than behavioral biases, that are the main drivers of anomalies.

Keywords: Fundamental Cycle, FFI, Momentum, Reversal, PLS, PCA, Anomalies, Factor Momentum

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