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Navigating the Fed's New Tone

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  • 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).

A graph showing the number of the number of the number of the number of the number of the number of the number of the number of the number of the number of the number of the number of

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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.

A graph showing the rate cuts

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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.

A graph with numbers and a red line

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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!

A chart of different colored squares

Description automatically generated with medium confidence

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.

A graph with a line going up

Description automatically generated 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.

A screenshot of a graph

Description automatically generated

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.

Investors long the S&P 500 using our 3x US 500

Alternatively, investors can short the S&P 500 using our -3x US 500

Investors long the Mag 7 using our FAANG+

Alternatively, investors can short the Mag 7 holdings using our -3x Apple , -3x NVIDIA , -3x Tesla , -3x Microsoft , -3x Alphabet , -3x Amazon , -1x Netflix .

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Violeta Todorova

Senior Research

Violeta è entrata a far parte di Leverage Shares nel settembre 2022. È responsabile dello svolgimento di analisi tecniche e ricerche macroeconomiche ed azionarie, fornendo pregiate informazioni per aiutare a definire le strategie di investimento per i clienti.

Prima di cominciare con LS, Violeta ha lavorato presso diverse società di investimento di alto profilo in Australia, come Tollhurst e Morgans Financial, dove ha trascorso gli ultimi 12 anni della sua carriera.

Violeta è un tecnico di mercato certificato dall’Australian Technical Analysts Association e ha conseguito un diploma post-laurea in finanza applicata e investimenti presso Kaplan Professional (FINSIA), Australia, dove è stata docente per diversi anni.

Julian Manoilov

Marketing Lead

Julian è entrato a far parte di Leverage Shares nel 2018 come parte della prima espansione della società in Europa orientale. È responsabile della progettazione di strategie di marketing e della promozione della notorietà del marchio.

Oktay Kavrak

Head of Communications and Strategy

Oktay è entrato a far parte di Leverage Shares alla fine del 2019. È responsabile della crescita aziendale, mantenendo relazioni chiave e sviluppando attività di vendita nei mercati di lingua inglese.

È entrato in LS da UniCredit, dove è stato responsabile delle relazioni aziendali per le multinazionali. La sua precedente esperienza è in finanza aziendale e amministrazione di fondi in società come IBM Bulgaria e DeGiro / FundShare.

Oktay ha conseguito una laurea in Finanza e contabilità ed un certificato post-laurea in Imprenditoria presso il Babson College. Ha ottenuto anche la certificazione CFA.

Sandeep Rao

Research
Sandeep è entrato a far parte di Leverage Shares nel settembre 2020. È responsabile della ricerca sulle linee di prodotto esistenti e nuove, su asset class e strategie, con particolare riguardo all’analisi degli eventi attuali ed i loro sviluppi. Sandeep ha una lunga esperienza nei mercati finanziari. Iniziata in un hedge fund di Chicago come ingegnere finanziario, la sua carriera è proseguita in numerose società ed organizzazioni, nel corso di 8 anni – da Barclays (Capital’s Prime Services Division) al più recente Index Research Team di Nasdaq. Sandeep detiene un M.S. in Finanza ed un MBA all’Illinois Institute of Technology di Chicago.

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