In this first Market Factors newsletter for 2025, we’ll first compare the relative success of trading strategies for bank stocks, then outline the most important charts for the coming year. The diversion is truly bizarre - an amusement park ride that intentionally kills people - and we’ll look ahead to important data releases.
Chris Helgren/Reuters
Strategy
How to trade bank stocks
BMO Capital Markets bank analyst Sohrab Movahedi published a report Monday that not only reviewed the sector’s performance in 2024 but also outlined the relative success of two popular bank stock trading strategies.
The bank sector’s 21.8 per cent total return in 2024 outperformed the S&P/TSX Composite by an infinitesimal 10 basis points. CIBC was the best performer, outdistancing the biggest laggard TD by 56 percentage points.
The bank sector underperformed the TSX in 2022 and 2023 but has outperformed the broader benchmark 70 per cent of the time during the past 50 years.
Performance updates are all well and good but it was Mr. Movahedi’s update on popular bank stock trading strategies that really caught my attention. When I worked with financial advisers, the practice of buying the worst performing bank stock of the previous year – it usually had the added advantage of being the highest yielding - was widespread. The expectation was for a kind of reversion to the mean, the worst performer playing catchup while the top performer lagged.
Executing this strategy in an aggressive way by buying 2023’s worst performer (TD) and shorting the best performer (CIBC) would have got an investor killed in 2024 – a loss of 56 per cent on the trade. This strategy would have been profitable only twice in the past decade (two years were flat) and generated an average loss of 7.0 per cent. Reversion to the mean for single bank stocks is no longer a reliable trading strategy, to say the least.
Last year was an anomaly in that an approach riding positive price momentum was extremely successful, according to Mr. Movahedi. Specifically, a two-sided trade of buying 2023’s top three performing major bank stocks (CIBC, National Bank and BMO), and shorting the year’s three worst performers (Royal Bank, BNS and TD) would have generated a return just less than 40 per cent.
Typically - and now we’re getting to the good part - a strategy of buying an equal-weighted basket of the three worst performing major bank stocks in the previous year, and shorting the top three performers, has been the path to outperformance. That strategy has been successful in 19 of the past 25 years and generated an average return of roughly 9.0 per cent.
The upshot to all of this: a single bank stock reversion to the mean strategy is unlikely to work but a diversified contrarian investment strategy is likely to be successful. I’m glad we got that straight.
Chief Economist at Credit Mutuel Arkea, Paul Chollet monitors price developments in the trading room of the Credit Mutuel Arkea group, in Le Relecq-Kerhuon, western France, on December 12, 2024.JEAN-FRANCOIS MONIER/AFP/Getty Images
Outlook
Charts to follow in 2025
Sherwood News (and former Report on Business) writer Luke Kawa chose what he believes will be the five most important market charts for 2025. These are investment in AI, U.S. homebuilding and sector employment, bitcoin, the importance of tech stocks in suppressing overall equity volatility and the Federal Reserve policy rate.
Mr. Kawa reminds readers that “housing IS the business cycle” because of the sheer scale of the U.S. real estate market as an asset class. If anything, the Canadian economy is even more dependent on residential real estate than the U.S., which is a sobering thought given already near-record high household debt levels. There’s not a ton of room for more debt, even in the event of additional rate cuts. This, combined with potential tariffs, makes the source of future Canadian GDP growth difficult to pinpoint.
Diversions
The Roller Coaster of Death
Many people believe they have the best ‘saved’ folder on Instagram, but they don’t - because I do. It’s exquisitely curated - comedy, obscure football players from the 1980s, Warner Brothers cartoons, golf tips, motorcycles and giant snakes.
The weirdest thing I added this year is a drawing of a roller coaster designed to kill people (it’s on Wikipedia here). Dubbed the Euthanasia Coaster, if ever built, would have reached 500 metres high and a speed of 360 kilometres per hour.
Designer Julijonas Urbonas, a former amusement park employee and PhD candidate at London’s Royal College of Art, said his goal was to take lives with “elegance and euphoria” through a combination of speed and turns that induced a fatal dose of G forces - 10 times the force of gravity.
The essentials
Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.
Globe Investor highlights
Our annual survey of Canadian fund managers and their top stock pick for 2025
What should fence-sitting but wary investors do as 2025 begins? Ian McGugan offers four suggestions
The best thing going for stocks in 2025? Lots of investors are worried, says David Berman. Meanwhile, here’s the three things that surprised David most about 2024
Wall Street strategists are consistently bad at forecasting markets, reports Tim Shufelt
Rob Carrick has these five TFSA ideas for investors trying to make sense of what’s coming in 2025
One stock pick took this former fire services’ captain’s TFSA to a million dollars. But that luck soon ran out, reports Larry MacDonald
What’s up next
A light schedule domestically leaves the net change in employment for December on Friday as the clear headliner. Economists expect a gain of 25,000 jobs. The unemployment rate will also be announced on the same day and a 6.9 per cent reading is forecast.
In the U.S., ISM Services for December is out Tuesday with an expansionary 53.2 reading expected. The FOMC minutes will be released Wednesday and they might cause market volatility. The always overhyped non-farm payrolls data is reported Friday where 153,000 new jobs is forecast. A 4.2 per cent unemployment rate is also expected.
Delta Airlines Inc. will report earnings on the 10th and US$1.762 per share is the average estimate. Alcohol purveyor Constellation Brands Inc. will also release results on the same day (US$3.311).
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)