Table of Contents
This year, making money in any market has been challenging despite Trump's trade triumphalism and AI frenzy. Even the trade that has been driving US markets is beginning to falter.
The cross-asset malaise results from the unpredictable Federal Reserve and the persistent inflation.
Towards the end of 2024, the largest exchange-traded fund that tracks long-dated Treasuries was significantly underperforming.
The commodities market was whiplashed as a result of the ebb and flow of Chinese stimulus.
Even the most secure loans saw their gains curbed as rising rates sent BlackRock's $30 billion investment-grade ETF into its lowest quarterly performance in eight years.
Equities were the lone bright light, and American corporations once again took centre stage.
The increase was anything but constant, though; even on Friday, during a typically sluggish year-end session, the S&P 500 fell by as much as 1.7% for no apparent reason.
Dropping to that level rounded off a rough year for value and small-cap stocks, as the typical S&P 500 member only managed a 25% return.
It was also the second consecutive crushing defeat for momentum investing, popularly known as riding the market's winners. This strategy is the only equities strategy that has been consistently profitable in 2024.
A record-breaking year for momentum has paid off handsomely for its devotees, but it has also increased the likelihood that more explosions like Friday's will be the norm.
Still, data from the S&P Dow Jones indices, dating back to 2002, indicates that the prevalent quantitative strategy of purchasing the best performers from the previous year while divesting from the underperformers has achieved a 31% return in 2024, positioning it for its most robust year to date, despite last week's decline.
Nvidia and Meta, two tech industry heavyweights, maintained a near-constant position at the top of the stock rankings.
Even if it's a boon for index fund holders, the tired formula makes people even more worried that market gains are too concentrated.
Clearly, the cracks have started to appear in that strategy.
This is coming amidst a network of uncertain variables, including the US central bank's dovish and hawkish policies, global electoral turmoil, escalating geopolitical tensions, and China's evolving approaches to economic stimulation.
The risk parity idea, a multi-asset portfolio strategy intended for consistent performance, ended the year largely stable, as indicated by the RPAR Risk Parity ETF, due to numerous conflicting influences.
Academically supported and extensively employed by quantitative traders, the momentum strategy makes use of the fact that market movements tend to last for a while, whether that's because more investors are getting in on the action or because fresh information takes time to sink in.
Each rebalancing shifts its investments into the most recent winners, allowing it to better track trends over the medium to long term.
According to Bruno Taillardat, head of smart beta at Amundi, momentum emerged from its summer slump by including more cyclical stocks, which ultimately benefited from Donald Trump's victory, and betting heavily on technology.
There is escalating apprehension that stock momentum has become self-perpetuating due to the strategy's substantial profits, especially considering the rising prevalence of passive funds.
Still, the strength of market momentum is due to technology's emerging as an exceptionally resilient winner, partially due to the AI explosion.
In their 2025 outlook, UBS strategists led by Maxwell Grinacoff said that the sector's profitability and balance sheet strength might make it resilient enough to weather even a recession.
New tech, including cryptos and blockchain, are a big hit and are among the top bets for 2025.
