Once a hot stock market trend has a name, its best days are probably over

Once a hot stock market trend has a name, its best days are probably over

Once a stock market trend is identified and named—think FAANG or the Magnificent Seven—the biggest gains are usually in the past. But riding a trend once it has been named can lead to market-beating returns for another year or so before the trade loses momentum and gives back some of the gains.

Once a stock market trend is identified and named—think FAANG or the Magnificent Seven—the biggest gains are usually in the past. But riding a trend once it has been named can lead to market-beating returns for another year or so before the trade loses momentum and gives back some of the gains.

To examine the performance of named trends in the stock market, my research assistants (Matthew Rickard and Camilla Marin Builles) and I did a deep dive into eight named trends over the past 10 years that were popularized by the mainstream media and covered by more than three such organizations.

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To examine the performance of named trends in the stock market, my research assistants (Matthew Rickard and Camilla Marin Builles) and I did a deep dive into 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 stated trends we explored 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 (second A after 2017), Netflix and Google.

• Granola—for major 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 technology 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 such as Mamaa (Meta, Apple, Microsoft, Amazon and Alphabet) and Emcloud were omitted due to overlap with other named trends and their inclusion would not have changed the results.

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

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

The first interesting finding: When we look at the average of all eight of these named trends, we see a significant increase in price before the trade is named. For the 24 months prior to the zero date, we see that the average stated trend provides a 36% excess return. 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 in the two years before it was named.

But even if you don’t have that magical foresight, it still can’t hurt to stick with a trend once it’s invented. On average, once the trend is named and looking ahead 12 months, an investor can still earn about 13 percentage points in excess returns.

Still, 12 months after naming is the best you can do, as returns peak on average at that point and taper off a bit thereafter. From the 12-month mark to the 24-month post-trend mark, the named trend average lags the S&P 500 by about 2 percentage points.

When we look at the individual named trends, it may 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% excess returns over a two-year period after being were forged from the press.

On the other hand, the MT SAAS trade fared the worst, shedding over 95% in excess returns over the two-year period following the appointment.

Generally, this means that your best bet is to jump on board with a named trend as soon as you hear about it – provided you’re not too late to the party – and take advantage of the initial momentum if it happens. But if you go past the 12-month mark, the returns might not be so great.

Derek Horstmeier is Professor of Finance at the Costello College of Business, George Mason University, in Fairfax, Virginia. He can be reached at [email protected].

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