The Trump era has so far been a painful time for conservative investors (like me). Success in equities has come to those as bold as the president himself. I won’t comment on how much longer this can serve our Commander in Chief (such prognostication is outside my wheelhouse), but I can and do suggest that in the stock market, it would be a good idea for the brave to back away a bit from the edge, and be a bit friendlier to who use the Q-word (quality).

The Appetite For Risk Has Been Real

There are many ways to measure risk-taking versus avoidance in the market. My favorite is to compare the performance of the iShares Edge MSCI USA Momentum Factor ETF (MTUM) with the iShares Edge MSCI Minimum Volatility ETF (USMV). Both are model-based portfolios constructed exactly the way the fund names suggest they are constructed. I monitor the relative performances of these ETFs by constructing a simple screen onPortfolio123. The screen has one rule that tells me to buy MTUM. For testing purposes, I compare it to a benchmark that consists of USMV.  

Figure 1, taken from the Portfolio123 screen back-tester, shows how these funds have performed over the past 15 years (Note: The ETFs have existed only since 2013; data before that is pro forma and is based on the indexes the funds are designed to track.)

Figure 1

We see that over the span, momentum (risk taking) has usually not been productive. This is consistent with other research that has depicting stronger than theoretically likely performance of low-risk strategies. (See, e.g., a paper describing Warren Buffett’s alpha and the betting- against beta phenomenon.)

Lately, though, things have been out of whack. There’s much that’s debatable about Donald Trump’s presidency, but two things are absolutely and objectively clear. The stock market has been a powerhouse — SPY returned 18.03% from inauguration day (1/20/17) through 9/14/18 — and risk has beaten the daylights out of prudence: MTUM returned 29.96% versus 16.86% for USMV. See Figure 2.

Figure 2

This is a different aspect of a phenomenon about which I commented in recent posts discussing my Goldilocks Value screens (a large-cap version and a small-cap version). Essentially, we’ve been enjoying great things in terms of the economy and earnings, helped by the mega tax cut, and we continue to power ahead. Risk is a concern when we anticipate tough times, not boom conditions.

Time To Consider A Cold Shower?

Look again at Figure 1, particularly the most recent portion of the graph. Visually, it looks as it MTUM’s strength viz. USMV has started to wane. Table 1, a numeric summary of the 15-year trends, confirms that it’s not an optical illusion. MTUM’s superiority to USMV can no longer be taken for granted.