Forward Note - 2024/01/07
The most precious currency we have is time, yet it holds no value without a robust credit of health. As 2024 begins, I wish you all to take good care of yourself and spend as much time as possible with your loved ones.
I also want to take the time to thank you if you are reading this note. What was a little pet project born at the end of 2023 grew into something much bigger thanks to your constant support, encouragement, and feedback. Please keep them coming; it helps me to continuously improve the content and make sure it is valuable to each and every one of you.
That being said, I am very excited to discover how the markets will develop in 2024.
And let's just say they didn't wait for us to come up with diet plans to shed the extra pounds accumulated during the holiday feasts. In all fairness, given the investor’s gluttony at the end of 2023, we won’t take offence for it.
The Nasdaq boasted a 55% performance in 2023, the best since 1999, with almost 20% of that growth in Q4 alone. This remarkable surge was the market's way of toasting to the increasingly likely prospect of a soft landing, further buoyed by the Federal Reserve's hints of a peak in rate hikes.
Even bonds experienced a rally in November and December, bouncing back from their dramatic losses in Q3. They ended the year nearly flat, marking it as one of the most volatile years on record for what is typically a more stable asset class.
Investors couldn’t believe their eyes at the end of December, witnessing all-time highs within easy reach for the SP500. It felt like the grand finale of a spectacular year-end bash.
However, the excitement fell down during the holiday break, and the relative weakness in the first trading week of the year was, at the very least, anticipated and, perhaps, a necessary sobering moment.
The Nasdaq closed down on Friday by almost 4%, with the S&P 500 dropping 2%. Without the unexpectedly positive job report, the mood might have been even more subdued.
Or perhaps more optimistic – it's hard to say these days. The aftermath of the Fed's year-end comments has certainly left the market hangover. Strong economic data now prompts a bit of a headache among market participants: if the economy is strong, the Fed might not cut interest rates. And if the rates stay put, could it be that we've overindulged in stocks?
This dialogue of uncertainty and speculation is on repeat in every fund manager’s mind, stirring up nervous energy in the marketplace.
Even the Financial Times, known for its traditionally reserved and measured British approach, succumbed to the prevailing alarmist mood.
Phew, it's only January 7, 2024, and we can almost feel the earth opening below our feet.
Let's shake off the post-party blues and focus on the facts:
1/ The US economy added 214,000 jobs in December? That's a very positive indicator. While time remains our most valuable asset, some actual good ol’ dollar bills in the back pocket ain’t never hurt nobody. Investors take notice of a healthy economy and are usually not content to just sit on the sidelines.
2/ 13.35 – Does this number ring a bell? It is not the average time Europeans have lunch on Sundays, but the current VIX level.
At Sharpe Two, we stay away from directional bets. Yet, understanding the prevailing market regime is key to making informed decisions.
Despite the early weakness in equity markets, with the VIX at 13.35, it's evident we're still navigating a low-volatility environment. And for those who love data, here's a glimpse at what our volatility regime clusters look like:
Sure, our indicator suggest a shift from a very low volatility phase to a more normal one. Is this a cause for panic, though? We don't think so. As volatility traders, we welcome a bit of turbulence to help propel our strategies forward. As always, we'll keep a close eye on upcoming developments to pinpoint the best opportunities and share them with you.
So, as we toast to a robust economy and a return to normal volatility levels, we extend again our warmest wishes for a prosperous New Year 2024.
Next week calendar
The focal point of this week's economic releases will be on Thursday, with the latest inflation figures due. It goes without saying that these numbers will significantly influence market direction. This is especially true if the inflation rate exceeds the expected 3.8%. Additionally, several Federal Reserve speakers are scheduled to address the public on Monday and Wednesday. We expect them to reiterate the message that, although interest rates may have reached their peak, the market's expectation of six rate cuts this year might be overly optimistic.
In other news
This week marked the release of major hedge fund performance figures for 2023.
As we step into the Dragon Year, industry heavyweights like Millennium and Citadel are boasting gains of 10% and 15%, respectively.
This year was particularly favorable for equity players such as Whale Rock and Cadian. Even Tiger Capital bounced back with a very respectable 28.5% gain after two years in the red. With the Nasdaq's surge of over 50%, the success of these firms, while somewhat expected, is still remarkable. Outperforming the market is never easy, a sentiment macro players would likely echo. Although Ray Dalio has been less involved in Bridgewater's day-to-day operations since September 2022, his fund's performance in 2023 – down by 7.6% – is bound to raise some eyebrows.
Regarding Haidar Jupiter, those offering sympathy might recall their lucrative bond market strategies that returned an eye-popping 193% in 2022. Yet, considering their fluctuating year-on-year results, one has to ponder about their Sharpe Ratio – certainly, it's not hovering near two (sorry, that was way too tempting; we won’t do it again).
Thank you for reading up until here, and a few smart reads that have captivated us this week.
Do not miss the New Geography of American Growth by
- it is particularly enlightening about the current economic state of the Union.We’ve left you with an article on why short-dated options had dangerously high levels of gamma; here is a more intuitive explanation of this fundamental concept in options trading by
.
Have an excellent week ahead, and happy trading.
Ksander