• Fed minutes’ hawkish tone
• 2023 winners could be 2024 laggards

The Fed disclosed its Minutes yesterday from their December meeting. Here are the key points:

· Officials share the markets’ view of rates at/near peak levels for this cycle.

· They also agree that rates will come down in 2024.

· However, are cautious about the scale and speed of the cuts.

The tone was overall more cautious and even slightly hawkish than probably most market participants expected.

FOMC members do not want to repeat the 1970s and 1980s inflation disaster, where rates were cut prematurely and inflation got seriously out of hand.

That message seems to be waking up the bears, as traders are now pricing in a 68% chance of a Fed rate cut in March, down from an 86% chance last week.
(The Red circle shows the aftermath of the Fed Minutes, while the green circle indicates the market reaction to the FOMC Dec meeting).

Source: ZH

Perhaps it’s « sober January, » as everyone’s back from vacation; this week is becoming a reality check to the past several weeks of euphoria, where the S&P nearly crossed its all-time high.

The markets still forecast double the number of cuts, or 6 to be precise, compared to the Fed guidance of 3; green shading represents the FOMC meeting.

Source: ZH

Past leaders could become future laggards.

It’s not a secret that the tech darlings have been carrying the market on their shoulder in 2023.

The S&P 500 ended 2023 with a remarkable nine-week run of consecutive gains, driven by the excitement over artificial intelligence (AI) and expectations that the Federal Reserve would begin reducing interest rates soon.

Source: Edward Jones

Last year, a few large tech companies, notably the « Magnificent 7 » (Amazon, Apple, Alphabet, Meta, Microsoft, NVIDIA, and Tesla), greatly influenced the overall market. By mid-year, these companies were behind 90% of the S&P 500’s increases, largely thanks to advancements in AI that captured investors interest.

However, the average stock didn’t perform as well, mainly staying the same until mid-November, affected by ongoing concerns about high-interest rates. This was evident when comparing the S&P 500 Equal Weight Index, where each stock is equally weighted and showed no growth for the year, to the 100% gain of the Magnificent 7.

Here is another look at just how wildly valued the Mag 7 stocks are

The market cap of the 7 high-flying stocks stands at nearly 12 trillion, equating to that of the stock market size of Japan, Canada, and the UK combined!

Source: Apollo

On the other end of the spectrum were most companies in the S&P 500.

A record-high share of stocks in the S&P 500 have underperformed the index this year.

Source: Appollo

This divergence, so-called “bad breadth” in the U.S. stock market, is nothing new, but periods when this metric is elevated proceed with recessions, as indicated by the shaded areas.

, the market has become top-heavy, relying on a few household names to continue to drive virtually all the gains in the S&P 500, which leads to over-concentration risks.

The January Effect

Historically, January has been one of the strongest, if not the strongest, month for equity returns.

Source: WSJ

Historical data from Dow Jones Market Data, dating back to 1928, shows that the S&P 500 typically sees an average increase of 1.2% in January, with a success rate exceeding 60%. Similarly, the Nasdaq Composite has historically performed best in January, averaging a 2.5% gain and experiencing upward movements 65% of the time.

Investors often purchase fresh shares following December’s tax-loss selling, which is done to balance out realized capital gains. Additionally, there’s a belief that investors have increased funds available for market investments in January, often due to receiving year-end bonuses.

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