Forward Note - 2024/01/14
Last week, we opened 2024 with optimism, hopeful for a robust economy and strong showing in financial arenas. And it seems the markets were listening, answering some of the lingering questions after a somewhat mixed first week.
The S&P 500 ended the week up by 1.85%, while the Nasdaq posted a notable gain of 3.18%. To put these figures into perspective, such performances are in the top 15% of weekly gains since 2004! Time to break out the champagne? Well, Janet Yellen already did when she boasted that the soft landing was underway.
The momentum we observed at the end of last year hasn't waned, and the buying flows - more on this on in a second - might sustain for some time.
Now, let's tackle the elephant in the room: why did the market surge despite higher-than-expected inflation figures? True, there was an initial dip of about 1% following the announcement. But it got easily absorbed throughout the rest of the session.
Kris, in a post originally written after the strong job report last Friday and then recycled post-CPI, offers a compelling perspective on the market's resilience.
He presents a fictional financial advisor advocating heavily for market entry to one of his clients, Jim. Not only is the tweet laugh-out-loud funny, but it also sheds light on the impact of massive waves made by professionals. And currently, these flows are pouring in, boosted by an increasingly robust growth narrative.
We bet some eyebrows are shooting up right now: how can a 4% inflation rate be seen as beneficial to the economy, and why does the market rise on such news?
The answer lies in stepping back from the minutiae of macroeconomic data. Obsessing over details can sometimes cause us to lose sight of the broader picture.
Inflation is often a byproduct of growth and a thriving economy. When people have stable jobs, receive their paychecks on time, and can spend or invest their money – whether in stocks, real estate, or even Bitcoin – it naturally tips the demand-supply balance, leading to a rise in prices.
That's the crux of it. Of course, one can dive deeper into macroeconomic analyses and tumble down rabbit holes. However, the simple truth remains: a moderate level of inflation is indicative of a healthy economy, at least for the moment.
A Side Note: We recognize that individual experiences can significantly differ from broader economic trends. If your personal situation does not mirror the overall state of the economy, we empathize deeply. Our sincere hope is that 2024 brings your circumstances more in line with the general economic upswing.
Now, let's consider inflation from the Fed's and the market's perspective. What they're keen to avoid is a return to excessively high inflation rates. But what constitutes 'too high'?
Here, you have a choice in your approach to understanding this. You could dive head first into complex models from economists, or you could simply think as a consumer — what is your personal threshold for 'high' inflation?
A quick poll we conducted this week suggests that the public perceives 5.2% as the tipping point for high inflation. Our small-scale study echoes this formidable post by the IMF about how consumers think about inflation. With the current rate at 3.9%, we are well below that level of public concern. While we believe the estimation of 6 to 8 cuts in 2024 is overly optimistic, the market sentiment has shifted from the inflation narrative, reducing the likelihood of significant market volatility or nervousness tied to interest rate concerns.
Looking ahead, key indicators will shed light on the growth trajectory and whether or not the plane has softly landed. Next Thursday's GDP data will provide insights into potential signs of economic deceleration. Additionally, as corporations begin to release their earnings reports, we'll gain a clearer picture of their outlooks and any concerns for the upcoming six months.
In the meantime, let’s steer clear of the doom and gloom that’s all too common in mainstream media – and yes, that includes the financial press. It's easy to get caught up in pessimism, but it's important to keep a level head.
It's also important to recognize the market's collective intelligence. With the VIX at 12.7 and the VVIX at 86, the market isn't oblivious to risks; rather, it's pricing them as low-probability outcomes.
Bet against these odds at your own risk! In the meantime, the flow must go on.
In other news: SEC's Cybersecurity Blunder.
When we talk about the cost of cybersecurity breaches for organizations, we're counting in trillions. But how do you measure the profits cybercriminals rake in? Well, the recent hack of the SEC's Twitter account gives us a tangible example. The account was compromised - add 2FA to all of your accounts now - and a fake message was broadcast, claiming that all Bitcoin ETFs had been accepted. Predictably, Bitcoin and cryptocurrency prices shot up. But when it became clear that this was a hoax, they pulled back.
Adding to the drama, within 24 hours of the false alarm, the SEC made the landmark announcement: Bitcoin ETFs were, in fact, set to be released to the public.
Amidst all this, one can't help but muse about the trading activities of certain notable figures; it makes one curious about who might have capitalized on this unexpected price action. Imagine if Nancy Pelosi and other members of Congress were required to disclose their crypto holdings. And speaking of notable figures, what about Elon Musk? We remember his days of dabbling in various coins before his pricy acquisition of … Twitter.
Another Side Note: we're not making any allegations, nor do we possess any concrete evidence related to the aforementioned events. Our intention is simply to provide some intriguing 'food for thought' to our readers during these eventful times.
Thank you for staying with us to the end. Before you go, we'd like to recommend a few insightful reads from last week:
Following up on our discussion on cybersecurity, you can’t miss the 'Darknet Diaries' episode on Newswire, where some hackers managed to hack the site to get access to privileged information for months. This podcast is a personal favorite of ours, thanks to its thorough research and the depth of insight from its guests. Highly, highly recommended, in a world becoming more and more digital and fueled by AI technology.
For tech enthusiasts/investors, don't miss this insightful piece by
, reflecting on the end of the Zero Interest Rate Policy (ZIRP) era.Lastly, we were thrilled with the response to our article 'How to Build a Sharpe 2+ Portfolio Blending the VRP and IV Rank.' A big thank you to all our readers for the overwhelming attention it has received.
Have an excellent week, and happy trading,
Ksander