Once a Hot Stock-Market Trend Has a Name, Its Best Days Are Likely Past -- Journal Report

By Derek Horstmeyer

Once a stock-market trend has been identified and named -- think FAANG or the Magnificent Seven -- the headiest gains are typically past. But riding a trend after it has been named can deliver market-beating returns for another year or so before the trade loses momentum and gives back some of the gains.

To study the performance of named stock-market trends, my research assistants (Matthew Rickard and Camila Marín Builes) and I did a deep-dive on eight named trends over the past 10 years that were popularized by the mainstream media and covered by more than three such organizations.

The final list of named trends we researched was:

-- Watch -- for retailers Walmart, Amazon.com, Target, Costco Wholesale and Home Depot.

-- FANG -- for tech titans Facebook parent Meta Platforms, Amazon, Netflix and Google parent Alphabet.

-- FAANG -- for Facebook, Amazon, Apple (the second A after 2017), Netflix and Google.

-- Granola -- for big European companies GSK, Roche, Nestlé, L'Oréal, LVMH Moët Hennessy Louis Vuitton, Novartis, Novo Nordisk, ASML Holding, AstraZeneca, SAP and Sanofi.

-- The Magnificent Seven -- for tech giants Nvidia, Tesla, Meta, Apple, Alphabet, Amazon and Microsoft.

-- MT SAAS -- for cloud-computing players Microsoft, Twilio, Salesforce, Adobe, Amazon and Shopify.

-- BAT -- for Chinese tech firms Baidu, Alibaba Group and Tencent.

-- Cloud -- for emerging cloud-computing stocks, notably PayPal, Zoom Video Communications, Vimeo, Dropbox, Alphabet, Adobe and Salesforce

Smaller named trends like Mamaa (Meta, Apple, Microsoft, Amazon and Alphabet) and Emcloud were omitted because of overlap with other named trends, and their inclusion wouldn't have changed results.

From first mention

Next, we identified the first date each trend was mentioned in the popular press. Then, for each named trend we looked at the stock returns around this date going back 24 months before the zero-date (date of first mention) and 24 months after the zero-date.

For each named trend, we use an equal weighting to calculate the return of the trade. So, for instance for FAANG, we applied a 20% weight to Meta's return, a 20% weight to Apple's, a 20% weight to Amazon's, 20% to Netflix and 20% to Alphabet. Finally, we calculated the cumulative excess returns over time for each named trend, where the excess return is the return for the trade minus the return on the S&P 500.

The first interesting finding: When we look at the average of all these eight named trends, we see considerable price run-up before the trade being named. For the 24 months before the zero-date, we see the average named trend deliver 36% in excess returns. This means that if you magically knew about a new named trend before it happened, you could earn 36 percentage points above the S&P 500 for the two years before it was named.

Worth the ride, until...

But even if you don't have this magical foresight, it still doesn't hurt to ride a trend once it has been coined. On average, once the trend has been named and looking ahead 12 months, an investor can still earn about 13 percentage points in excess returns.

Yet 12 months following the naming is about the best you can do as returns peak at this point on average and decrease a bit subsequently. From the 12-month mark to the 24-month mark after a trend has been named, the average named trend lags behind the S&P 500 by about 2 percentage points.

When we look at the individual named trends, it might surprise people that the two best trades from the zero-date to the 24-month mark in our sample were the BAT and Cloud trends -- both earning more than 60% in excess return over the two-year period once they were coined by the press.

On the other end, the MT SAAS trade did the worst, dropping more than 95% in excess returns over the two-year period after being named.

All in all, this means your best option is to jump on a named trend as soon as you first hear about it -- provided you haven't been too late to the party -- and ride the initial momentum, if it happens. But if you get in past the 12-month mark, the returns might not be so magnificent.

Derek Horstmeyer is a professor of finance at Costello College of Business, George Mason University, in Fairfax, Va. He can be reached at reports@wsj.com.

(END) Dow Jones Newswires

March 01, 2024 09:00 ET (14:00 GMT)

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