Resources/Weekly Insights

Volume 14, Edition 1 | January 12 - January 18, 2025

An Alternative to Chasing Shiny Objects

Doug Walters, CFA

As we enter the new year, we see a subset of investors with a mindset of reckless enthusiasm. Buoyant markets have lowered their risk guardrails. They see shiny objects and have a fear of missing out. There’s a better alternative.

Contributed by Doug Walters, David Lemire, Max Berkovich

In our quarterly Perspectives report we introduced the “reckless enthusiasm” mindset. It refers to the trend chasers out there getting sucked in by the myriads of shiny objects in the headlines. We’ve been here before. FOMO kicks in and rational thoughts exit stage left. There is a less reckless way to capture trends. In fact, it is evidence-based.

Before proceeding, I should say that I have no problem having a bit of fun with some speculative bets. But they should be just that, fun – and accordingly, they should be funded with your play money. The same money you might take to Vegas… because yes, you are gambling.

History is rife with these shiny objects. The dot com bubble is one of the more notable examples. Tulips and Beanie Babies also come to mind. In all these past events, a few people struck gold, while most eventually struck out. But we don’t have to look back that far. In 2021 we warned about SPACs, NFT art, MEME stocks and cryptocurrencies. Since then, SPACs, as a whole, massively underperformed equities, NFT indexes cratered, MEME posterchildren GameStop and AMC have lost most of their value, and cryptocurrencies… well I guess the jury is still out on that one.

Today, cryptocurrencies are still in the spotlight, chatter on MEME stocks has returned, and anything with AI or Quantum in the description is eliciting unfiltered excitement. Investors need not fall for this again. There’s a better way, backed by evidence. We’re talking about Momentum funds.

Momentum is one of the most persistent stock “factors” and is supported by strong academic evidence. It is the simple idea that what is going up will continue to go up. That may sound a lot like shiny object chasing, but these funds have two ways of filtering out fads from enduring trends. The funds we focus on:

look for a meaningful history of outperformance (both six and twelve months), and
they ignore the most recent month of trends

The second bullet is subtle but really important. There is a factor we do not talk much about as long-term investors. It is called Reversal. Over short periods of time, stocks that go up tend to reverse and go down. Such is the case for many a shiny object. Just as they start getting attention for outperforming, they reverse course. Conversely, holdings in a Momentum fund have shown a more enduring upward trend pattern.

You might be surprised at what you will find in a Momentum fund these days¹. Of course there is Artificial Intelligence exposure, like Nvidia, Broadcom, and Palantir. But you will also find a number of unassuming stocks that are significantly outperforming S&P 500 heavyweights Microsoft and Apple, including:

Financials: JP Morgan and KKR
Retailers: Walmart and Costco
Energy Plays: GE Verona and Williams Cos

It’s doubtful that all of these would be on your radar as big outperformers, but their stocks have been on a tear.

It should be said that Momentum funds do not always work. Yes, they tend to outperform over time, but if the market is directionless for an extended period of time (like we had in the years of and following the pandemic), they can struggle to outperform.

To wrap it up, while the allure of shiny objects can be powerful, most are not investments. Stay focused on the evidence and consider the role a Momentum fund can plan in capturing rising trends within a well-diversified portfolio.

For those with young kids and the young at heart, here is another Shiny object we can get behind: Shiny (from Moana)

1. Looking at isHares MSCI USA Momentum Factor ETF (MTUM), and Vanguard US Momentum Factor ETF (VFMO)

3.2%

Core CPI inflation was slightly better than expected

Core CPI inflation (ex-food and energy) came in at 3.2% compared to expectations of 3.3%. Including food and energy, the index rose 2.9% as expected.

Headline of the Week

A Moving Target

Last month saw the latest Fed “dot plot” change the path for interest rates, sending yields higher and stocks lower as the market recalibrated. Fast forward to this week and another recalibration is arguably underway or rather a reverse recalibration. This week there were some pockets of favorable news on the inflation front. First up was a measure of produce prices coming in softer than anticipated. This measure has implications for the Fed’s preferred Personal Consumption Expenditure (PCE) measure due out later this month. Next up was another softer inflation report. This time Core CPI had a slight decline.

Neither report seems likely to push the dot plot back to where it was and the Fed most likely will take a break from rate cuts this month. However, should inflation restart its downward trajectory, then additional rate cuts could come back into the conversation. While markets recalibrations can happen quickly, the Fed remains committed to following the evidence and data. So, we could be in for more recalibrations depending on which way the inflation winds are blowing.

The Week Ahead

The holiday shortened week will be a bit lackluster, with rate decisions in the Far East and earnings from a copious amount of non-tech blue chips in the driver seat. Activity from the first week of the second Trump administration will most likely drive market direction.

Rise and shine

The Bank of Japan will kick of the 2025 central bank parade with a rate decision.

The Yen is languishing at a six-month low and Governor Ueda has signaled a rate hike is up for debate at this meeting.
Markets are pointing to a 70% or greater chance of a rate hike.
A hike, at least in the short-term, may help ease the Yen’s pain versus the strong US dollar.
The People’s Bank of China also has a rate decision on Monday, but no action is expected.

Feeling Blue

Earnings season has kicked off with banks and investment firms leading off. Some old-school blue-chip companies will grab the baton in week two.

General Electric, Procter & Gamble, Johnson & Johnson, Verizon, Union Pacific and American Express are certainly the names that investors recognize.
However, the two that will probably get all the attention will be Travelers & Netflix.
Travelers, one of the biggest property and casualty insurers will be put on the spot regarding the cost of the California fires as they are the 6th biggest insurer by written premiums in that State as of 2023.

Part II

President Trump’s inauguration is on Monday, falling on a national Holiday, Martin Luther King, Jr. Day.

While the pomp and circumstance of the event will be worth watching, investors will pay closer attention to the first few acts of the presidency.
The inauguration is also going to upstage the beginning of the Davos conference and the start of a ceasefire between Hamas and the State of Israel.

The US Markets are closed on Monday!

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