With growth stocks out of favor, the idea of embracing momentum may seem counterintuitive to many investors, but some analysts argue market pullbacks – even in this environment – offer investors opportunity to consider adding momentum equities.
For market participants who want to test that thesis without the burden of stock picking, exchange traded funds such as the Invesco QQQ Trust (QQQ ) and the Invesco NASDAQ 100 ETF (QQQM ) are worth considering. As growth-heavy ETFs, both funds are homes to plenty of stocks that often sport the momentum label.
That could prove important because some experts argue that the Federal Reserve isn’t attuned to investors’ thinking amid this year’s rampant rate hiking.
“We believe the Fed is not properly assessing the effects its message is having on investor psychology,” noted Well Fargo equity analyst Christopher Harvey in a recent report. “This also implies the recession likely will be longer/more severe than current fundamentals and market risk indicate.”
As ominous as that sounds, the silver lining is that long-term investors will be presented with opportunities to embrace momentum fare, perhaps at discounts — a scenario that highlights the appeal and utility of QQQ and QQQM.
“Long-term Momentum typically outperforms in stressful times by keeping investors away from adverse stock situations. In simplest terms, it is a ‘chart-looks-good/bad’ market. Last year we became more constructive on Momentum strategies, and now it is time to re-emphasize the three-pronged message: (1) do not go bottom fishing; (2) shake broken stocks from the portfolio; and (3) add long-term momentum exposure,” added Harvey.
Wells Fargo identified dip-buyable momentum names across the 11 GICS sectors. From the communication services sector, the bank likes video game giants Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA), both of which are QQQ and QQQM components.
Consumer discretionary, which is the second-largest sector weight in QQQ and QQQM behind technology, is home to some stocks Wells Fargo likes. Those include O’Reilly Automotive Inc. (NASDAQ:ORLY) and discount retailer Dollar Tree (NASDAQ:DLTR).
Vertex Pharmaceuticals (NASDAQ:VRTX), which is one of the healthcare holdings in the two Invesco ETFs, is also one the Wells Fargo list.
“From a portfolio perspective, we believe one of the best solutions is to increase exposure to long-term price Momentum factors, which have a history of outperformance during periods of stress,” concluded Wells Fargo’s Harvey.
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