Resources/Weekly Insights

Volume 14, Edition 3 | February 2 - February 8, 2025

A Step Ahead of the NFL

Doug Walters, CFA

The NFL gets it. They need to up their allocation to international markets and are taking steps to do just that. Your portfolio should be ahead of them. You just need to push aside those mental barriers.

Contributed by Doug Walters, David Lemire, Max Berkovich, Matthew Johnson

The NFL understands the value of diversification. They may not be good at it, but they get it. Unlike the NBA which has done well drawing international athletic talent into its leagues (around 30% now), the NFL is still floundering in single digits. There is untapped football talent and an untapped fanbase around the world and they want it. They’ve launched the International Player Pathway Program and drummed up interest with the NFL International Series of regular-season games played overseas. It will be a long haul. But for evidence-based investors, international diversification is a lot easier. The main obstacles are mental.

It is established in academia that a well-diversified portfolio should contain equities from around the world, both developed and emerging markets. Likewise, the NFL recognizes that not all the best talent is home-grown. Yes, more kids in the US play football than kids in other parts of the world, but we do not have a monopoly on the best athletes. The same is true of investments. There are great companies as well as companies trading at a great value around the globe. That’s not even to mention the risk benefits of exposure to different economies and currencies.

Despite the evidence that supports the virtues of a well-diversified portfolio, we still see pushback on international ownership. We believe this as coming from two sources:

General home bias. This is a well-studied scientific phenomenon. Even when presented with the benefits of diversification, investors are influenced by a preference for familiarity and even patriotism.
Recency bias. The US market has been among the best places to invest the past few years. Investors seem to be seeing this “exceptionalism” as inevitable. We don’t predict much, but the future will eventually disprove the inevitability.

Biases are not unique to investing. We see them in football as well. Think about how much more likely a coach is to go for it on fourth down these days. In the past, there was an unwarranted stigma that accompanied a failed fourth down attempt. Today, coaches have evidence on their side and don’t hesitate to give the go-ahead when the odds are stacked in their favor. Fans and owners get it. Our job is to rise above the biases and follow the evidence wherever it may lead. Of course, it doesn’t hurt the case for diversification when international outperforms, like it has been thus far this year.

4.0%

Unemployment Rate

Unemployment remains low, working against the case for a lower Federal Funds Rate.

Headline of the Week

The Give and Take of Economic Data

The first Friday of the month means another jobs report formally known as the Nonfarm Payrolls report. While January’s number (143,000) was below expectations, revisions to the previous two months added about 100,000, illustrating the “take and give” of these reports. Meanwhile, the unemployment rate ticked lower to 4% vs 4.1% expected, arguably another “give.”

Due to the changes in Washington, this report may be receiving a bit less attention than usual. The nature of the report showing that the employment picture remains solid seems unlikely to shift the Fed’s holding pattern on rate cuts. Should the shifting tactics in Washington “take” some of this strength, the Fed’s rate calculus could shift. Conversely, potential tariff implications on inflation could “give” the Fed some difficulty. The give and take seems set to continue.

The Week Ahead

Sandwiched between the Superbowl and Valentine’s Day, the menu for the week has a Gross Domestic Product (GDP) release from the UK and inflation reports at home.

Old World, Old Problems

The United Kingdom’s growth, or the lack of it, will be scrutinized when they report GDP for the 4th quarter.

This will be on the heels of the Bank of England (BOE) cutting growth forecasts and raising the inflation outlook this past week when they cut rates by ¼ of a percent.
Stagflation, when growth stalls and inflation rages, is a major issue for England.
Flash GDP reports from the European Union are also on the calendar but are not expected to provide any meaningful revision from the first read.

Easy Does It

We get another read on inflation when the Consumer Price Index (CPI) releases on Wednesday.

The headline rate is expected to come in at the same pace as it did for December, 2.9% on an annual basis.
Meanwhile, core-CPI, which excludes food and energy, is expected to be 3.1% for January, a slight increase from December.
Month over month, inflation is expected to be a shallow 0.3% for both headline and core-CPI.
With inflation reports coming in-line with expectations the last few months, a surprise has potential to rattle some cages.

Sweet and Sour

We can always count on news flow from the White House to move the markets next week, but there are a handful of earnings and a Chairman Powell testimony in congress that can sweeten or sour investor’s moods.

Earnings from McDonald, Coke-Cola, Unilever, Cisco, Deere, CVS, and Shopify could catch a headline or two in a light week.
The Federal Reserve Chairman is expected to testify in Congress after the central bank releases its semi-annual Monetary Policy report.
With Chairman Powell continuing to avoid direct comments on tariffs and fiscal policy, it is hard to imagine what he can say to spook markets.
The lone significant economic data outside of the inflation reports is Retail Sales, but weak auto sales and crummy weather are already discounted, with muted expectations.

Enjoy the game on Sunday and Happy Valentine’s Day!

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