Mysterious MO moving the markets

After 37 years as an assiduous student of the markets and their convoluted movements we are still surprised how strong the force of momentum can be. It’s a law of physics applied to human behaviour. To be clear, we are not talking about so called “momentum stocks” who are more driven by hype than by fundamentals. In those cases, valuation is stratospheric or sometimes impossible to calculate. We will discuss the “normal” process in the markets.

Let’s get our vocabulary straight. The Oxford Dictionary offers two explanations for momentum. In physics, momentum refers to the quantity of motion of a moving body, measured as a product of its mass and velocity. In Newtonian mechanics, momentum is a vector quantity, possessing a magnitude and a direction. If m is an object's mass and v is its velocity (also a vector quantity), then the object's momentum p (from Latin pellere "push, drive") is: p = mv. Economists are familiar with the Fisher equation. MV=PT, where M = Money Supply, V= Velocity of circulation, P= Price Level and T = Transactions. These equations are funny stuff. What is important, is to understand the drivers behind a movement. The bigger the mass, the higher the velocity, the  stronger the momentum. Mag 7 anyone?

The second definition in the Oxford Dictionary is a bit more down to earth. Momentum is the impetus gained by a moving object. More precisely, the impetus and driving force gained by the development of a process or course of events as in "the investigation gathered momentum in the spring" or "the vehicle gained momentum as the road dipped". Again, using a bit of imagination investors know what this means in the stock market. Recently, United Health’s stock gained quite a bit of momentum when it was hit by consecutive negatives. A CEO being killed, not your every-day-company-news, a profit warning and a virulent attack in the Wall Street Journal, accusing the company of fraud. Being a heavy-weight (huge mass, i.e. market capitalisation) and the very fast sequence of events (velocity) caused the stock to lose 53% in just one month. The stock touched 606.36 USD on April 11^th 2025 and closed at 274.35 USD on May 15^th 2025 (with an intraday low of 248.88 USD). From top to intraday low that’s a whopping drop of 59%. To put this into perspective, this is about three times the market cap of AB Inbev, the world’s largest brewer. United Health is a perfect example of the devasting force of momentum in a negative sense. It’s one of the market’s most powerful drivers. Traders better make sure the Force is with them, lest they get overrun by a giant freight train.

As per Wikipedia, Newton's second law of motion states that the rate of change of a body's momentum is equal to the net force acting on it. Momentum depends on the frame of reference, but in any inertial frame of reference, it is a conserved quantity, meaning that if a closed system is not affected by external forces, its total momentum does not change. In the stock market, stocks most of the time hardly move. They trade within a narrow range. But when they start moving, especially on bigger volumes (more stocks traded) and even more so when stocks move in “uncharted territory” (reaching new highs), the moves can be both rapid and significant.

The market’s behaviour is much influenced by the degree of certainty or uncertainty that market participants have. We saw many examples of this on Euronext Brussels. Fairly recently, there was the Elia-saga. Elia, like the highly interest-sensitive real estate stocks, was enjoying an uninterrupted positive momentum from September 2015, when the stock broke out of its “inertia” (around 33 EUR), culminating in a top around 150 EUR in August 2022. It’s apogee was reached on 26^th of May 2022 at 152.975 EUR. For value-oriented traditional investors, valuation had become prohibitive. The PE-ratio rose from 12.3x at the end of 2015 to 30.1x at the end of 2021. The only way to rationalize that kind of valuation was by extending the period of negative interest rates “forever”. Investors felt reassured by the macro-environment. However, there is no escaping the classical return to the mean. “Lower for longer”-investors were punched in the nose by Poetin. In June 2022, Elia was hit by a touch of turbulence (-6.5% on June 16^th), but the stock recouped almost all its losses. That’s where it gets most dangerous for investors, who might be wrong-footed assuming that all is well and things (momentum) will continue as it used to in the past. However, the trend definitely reversed in September 2022. As is often the case, momentum gathered strength as the downward trend took hold. A first accelerated downward move occurred in September 2023, but this was more a generalized sell-off. The stock again recuperated its losses, only to start a new downward move that would culminate in a selling orgy in January 2025 leading the share price towards the 58-60 EUR range. Lo and behold, PE-ratio dipped to 11.2x. It was as if we were back in 2015. The “noise” was a cacophony of negative news and ominous rumours (cost overruns, huge dilution by a pending capital increase). Even analysts with a buy-rating on the stock actually advised to wait to buy until there was more certainty on the capital increase. Here’s where Warren Buffett might come in. At age 94, he still goes to the office every day. Not to deal with daily operations, but to be there when it really matters. In Warren’s words “I will be useful here if there’s a panic in the market because I don’t get fearful when things go down in price or everybody else gets scared.” Remember that there is always a buyer for every seller. So, at Elia’s rock bottom prices value investors were awakened by its “ridiculous” valuation. Sure enough, Fernand Huts (Katoennatie), accumulated shares at these bargain prices, just like he had started accumulating shares in 2011, with a first official disclosure of 5% ownership in 2014. Katoennatie is now Elia’s second most important shareholder with 9.28%. Like Warren, Fernand kept his cool and acted when the time was ripe. That is where momentum and value meet.

Of course, nobody knows the future. Decisions are always taken in uncertainty. Rational investors simply look for the highest probabilities. Buying an excellent company at a very low valuation offers a high(er) probability of decent returns. But investors and markets are not always rational. Markets are driven by expectations. These expectations are based on a hodgepodge of actual facts, careful calculations, beliefs, myths, group think, confirmation bias, shortsightedness and what have you. Two other examples illustrate this.

UCB has a reputation for being one of Belgium’s strongest growth companies. And yet, its stock went nowhere between 2015 and 2023. The stock hovered around 67 EUR in June 2015 and touched 67 EUR again in November 2023 with two brief excursions towards 110 EUR in 2020 and 2022. The story behind this stagnation is double. On het one hand, valuation reached a peak in 2015 (38x PE) dropping towards 17x in 2022. But the key factor was the uncertainty about the approval of UCB’s blockbuster drug Bimzelx. The FDA kept dragging its feet, leading to a “bear attack” on the stock. When the drug was finally approved on Oct 17^th, 2023, the market’s behaviour changed overnight. Well, that is not actually the case as the stock took a severe hit on the news of the approval. This extremely odd behaviour can be explained by the bears that still got the overhand, writing that sales would be hampered by a warning for suicidal ideation on the label. Thus, negative momentum continued. But not for long, because as soon as the first sales indications where known, together with first physician’s survey’s, everything reversed and UCB became the star performer in 2024. Momentum once again played its role.

The share price of Euronext has a similar history. This year, the stock is up a whopping 36%. That is about as much as the stock delivered in 2023 (+37.7%). Clearly, momentum has gained traction here. And yet… Euronext had been dead in the water for three years. In fact, momentum had been quite negative with the stock dropping from 105.5 EUR in Sep 2021 (intraday high) towards a low of 60.80 EUR in Oct 2022 (-42%). Valuation dropped from a PE of 22x to 12.6x. The most interesting thing here however, is the evolution of analysts’ target prices. Rather than anticipating the market moves, the target prices changed in sync with the share price. The fundamental story had not changed that much, but business momentum slowed (hardly any EPS growth in 2022). Nevertheless, it is remarkable that few analysts had buy recommendations when the valuation was really attractive. There were exceptions though. That changed in 2024, when Euronext was again showing strong earnings’ growth. Target prices moved up in sync with the share price and analysts got “braver and braver” with some shooting for the moon. There is no doubt that Euronext is a top quality company. But its valuation is back to the peak of 2019. This valuation may be “fair”, but it limits potential long-term returns.

To conclude, investors thinking about market moves can get a lot of inspiration from physics. Momentum has magnitude and direction. Direction is the first thing investors have to figure out. If you’re moving in the “right” direction, returns will turn out fine, provided there is no change of status. The first part requires a careful study of a company’s fundamentals in order to determine a range of possible intrinsic values within a long-term framework. Magnitude is where market dynamics come in. Newton’s “inertia” can be translated as “dead money”, meaning a stock that is going nowhere. When discussing this kind of stock with analysts and investors, one often hears that “there are no short term catalysts”. Indeed, there are no catalysts until there are. That is the fun game of the market. First, and most importantly, figuring out intrinsic values. Second, analyzing the “surroundings”, the “noise”, meaning what market participants (analysts, investors) write, think and do. Things may not be what they seem. Analysts don’t always think the same thing as what they write. An analyst can have a buy recommendation with a target price that offers significant upside, yet if one discusses the stock one can find out that in fact the analyst is wary of actually buying the stock and that in fact he is quite cautious. Investors don’t always walk their talk. That’s why one can find expressions like “a fully invested bear”. When circumstances change, i.e. when the status of inertia disappears or momentum changes direction, this can lead to fast moves. And that again, can be great fun for the alert trader. Or when momentum is driven to the extreme, it can awaken sleeping crocodiles à la façon the Warren Buffett. Berkshire is where momentum and smart investing meet. In Warren’s words: “We’re running a business which is very, very opportunistic. Charlie thought I did too many things. If we did 5 things in our lives, that would be enough.” At age 94, Warren finally lost a bit of his boundless energy, passing the baton to Greg Abel, a youngster of 62. And although Warren shuns market advice, he nevertheless did it again at Berkshire’s most recent AGM. Commenting on its huge cash pile (345 bn USD with 40 bn USD being added every year) Warren quipped: “Occasionally, it will happen again, it could be next week or 5 years off, he (Greg) will be bombarded with opportunities to use his cash. It’s not unlikely to happen within 5 years.”