Oh! Momentum!
Is it always darkest before the dawn?
Measured from the start of 2023, momentum strategies have outperformed beta indices. However, since the general elections in 2024, momentum strategies have taken a hit, giving up most of their gains in deep drawdowns.
Artisanal momentum strategies have yielded better returns but with even deeper drawdowns.
Deep drawdowns test investor patience and make sequence risk worse.
While risk management appears expensive during sideways markets, it saves you from going through the windshield during crashes.
Whether it is momentum with trend…
… or momentum cushioned with bonds…
… respecting the risk/return/cost tradeoff has paid off.
For example, the Tactical Momentum strategy went through multiple flip-flops over the last couple of years as the market moved sideways, racking up costs. However, when the market reacted to the Iran war on March 2nd, the SMA was breached again and it went into cash where it remains until this day.
Every backtest (The Enduring Effect of Time-Series Momentum on Stock Returns Over Nearly 100-Years, for example) will show that momentum is a premier anomaly. However, the lived experience through the short/medium term tends to be painful and leads to investors abandoning the strategy. Giving up a bit of the upside to limit the downside is a great behavioral hack that helps you stay invested during trying times.
Markets this Week
More here: country ETFs, fixed income, currencies and commodities.
Links
Research
Easy A’s, Less Pay (NBER)
Average grades continue to rise in the United States. Being assigned a higher average grade inflating teacher reduces a student's future test scores, the likelihood of graduating from high school, college enrollment, and ultimately earnings. A teacher with one standard deviation higher average grade inflation reduces the present discounted value of lifetime earnings of their students by $213,872 per year.
Work from Home and Fertility (NBER)
Estimated lifetime fertility is greater by 0.32 children per woman when both partners WFH one or more days per week as compared to the case where neither does.
India
Why AI has not yet upset India’s IT industry (economist).
Mutual funds have sold Indian government bonds at a record pace in March so far, as the Iran war drove up oil prices, heightening inflation risks, pushing the rupee to record lows and prompting a broad selloff across the debt market (reuters).
Most factories in Morbi, India’s ceramics hub in the western state of Gujarat, have shut down for nearly a month due to gas shortages triggered by the Iran war (bbc).
Indian diamond industry in turmoil (bloomberg).
Apple boosts India iPhone production 53%, now making a quarter of global output (yahoo).
GLP‑1 drugs may fight addiction across every major substance (theconversation).
row
The US-Israeli strategy against Iran is working. Every aspect of Iran’s ability to project regional power is being successfully degraded (aljazeera).
Gulf Arab states did not ask the U.S. to go to war with Iran, but many are now urging it not to stop short by leaving the Islamic Republic still able to threaten the Gulf’s oil lifeline and the economies that depend on it (reuters).
Shortages of fuels and chemicals threaten industries from farming to pharmaceuticals (economist).
Which country is the biggest loser from the energy shock (economist)? A two-month conflict could cause GDP to contract by double digits in Bahrain, Kuwait and Qatar, with declines of roughly 8% in the UAE and about 5% in Saudi Arabia (economist).
Bond traders are no longer pricing in any chance that the Federal Reserve will cut interest rates this year after the Bank of England stoked concern that global central banks may need to act soon against inflation (bloomberg).
The nation’s accelerating self-assassination: Total Boomer Luxury Communism (washingtonpost).
Nearly half of U.S. generic prescriptions originate in India, which relies on the Strait of Hormuz for the arrival of key inputs in drug manufacturing including petroleum-based materials, and for shipping finished medicines to the U.S. (cnbc)
Documents Reveal a Web of Financial Ties Between Trump Officials and the Industries They Help Regulate (propublica).
A financial tsunami is heading for Britain because of the Iran war, and it will leave the UK poorer for years to come (dailymail).
A.I.
A sufficiently detailed spec is code (haskellforall).
Pokémon Go players built a 30-billion-photo map that’s now training robots to deliver your pizza (fortune).
Why I’m not worried about AI causing mass unemployment (understandingai).
The ATM tried to do the teller’s job better, faster, cheaper; it tried to fit capital into a labor-shaped hole; but the iPhone made the teller’s job irrelevant. One automated tasks within an existing paradigm, and the other created a new paradigm in which those tasks simply didn’t need to exist at all. And it is paradigm replacement, not task automation, that actually displaces workers—and, conversely, unlocks the latent productivity within any technology.
Why ATMs didn’t kill bank teller jobs, but the iPhone did (davidoks)
Memes of the Week
