This week, anticipated as one of the busiest weeks of 2024, certainly lived up to expectations. And even if we didn’t hit the key milestones of 5000 on the S&P500, there are plenty of things to rejoice about.
We were left impressed by last week’s GDP growth of 3.3%, but the monster job report published Friday morning got us out of our chair. It revealed a remarkable addition of 355k nonfarm payrolls, doubling the number expected by Wall Street analysts.
Despite the U.S. manufacturing sector continuing its contraction in January, it showed signs of nearing stability, increasing from 47.1 to 49.1 and surpassing market expectations set at 47. With figures below 50 indicating contraction and those above 50 signaling expansion, we're on the cusp of potential growth in the upcoming quarter. Additional insights are expected from the services sector, which is forecasted to rise to 52.6 from last month's 50.6.
Regardless of the heated debate about the true state of the economy, Wall Street participants find it difficult to stay on the sideline when it surpasses expectations by such a large margin. As a result, the SP500 gained another 1.4% this week, with the Nasdaq also up by 1.2%.
But the real story might just be the VIX, which finished Friday under 14 for the twelfth consecutive week. This fact alone is all you need to know.
Let’s take a step back.
Fund managers' primary role is to allocate capital based on the market's current risk perception. No one wants the ignominy of underperforming against the S&P 500 for the second year in a row. Does this dynamic pave the way for overvalued assets? Maybe. But the truth is, it doesn’t even matter.
Analysts are well aware that NVDA is overvalued, trading at an astonishing 80 times its earnings. However, with the VIX hovering around 14, what's the alternative? Opt for 5% bonds and, at year's end, justify underperformance by claiming prudent capital allocation, all while charging a 2/20 fee?
Not the best way to retain clients.
Here are some (overly simplified) principles shedding light on fund managers’ decision-making process when they put money at work:
With the VIX below 16, the approach is often to buy now and think later.
When the VIX is under 20, the focus shifts to quality assets, with some hedges in place just in case.
A VIX above 20 signals a wait-and-see attitude, often coinciding with a closed IPO window due to tepid demand.
Above 25, there’s a significant event shaking the markets; lower-quality stocks are offloaded while managers scramble to protect their top holdings.
Sure, one can always try to predict the next move above 20 and wonder what will be the next catalyst to the downside. At VIX 14, the market doesn’t see it yet, and that is all you need to know.

Ironically, we’ve made it more than halfway through this note without touching on the Fed. This week saw the highly anticipated first FOMC meeting in 2024. The outcome? Rates remained unchanged, as expected. The market initially dipped in response to Powell's skepticism about a March rate cut, but this was quickly offset by AMZN’s robust earnings report and Zuckerberg's dividend announcement - we'll dive deeper into this shortly.
Ultimately, the market understands it is a slight delay in the inevitable: rates are set to drop eventually. May? June? Who knows, but the likelihood of seeing them above 5 by September is not in the cards.
What really caught everyone off guard was the tone of the message itself. It marked a dramatic shift from Powell's confident demeanor in December to an exceedingly cautious stance this time around.
Journalists, puzzled by the cautious approach, pressed on: When will conditions be good enough for action? Given the latest positive inflation and growth data, what exactly is causing hesitation? As tight lips as ever, nothing more transpired from the Fed’s chairman.
However, let’s do a (questionable) parallel with the world of software, where we have operated for more than 7 years; there’s a saying, "If it ain't broke, don't fix it." Perhaps the Fed is applying a similar logic to the economy - avoid tinkering too much for fear of causing harm.
The committee members are obviously well aware of the economy's robust performance. They're probably just erring on the side of caution, not wanting to jeopardize the chance of achieving the most flawless soft landing in history. By playing it safe, they bought a little bit of time, banking on the fact that the market can stomach the delays.
And honestly, they may just be spot on - where is the VIX right now? At 14.
And that is all you need to know.
In other news
Meta's announcement of a 50-cent dividend per share certainly turned heads, and the stock ended the week up another 20%. For those who missed snapping up Meta shares at below $99 during the last bear market, this might sting a little bit more. And while a 50-cent dividend on a stock trading around $474 might seem modest, for Zuckerberg, who holds a substantial stake, it translates to a hefty $700 million yearly paycheck. It’s moments like these that might have you revisiting your startup dreams, imagining the potential of a 20-year journey culminating in such financial success.
And with technology evolving at breakneck speed, the idea of billion-dollar companies run by a handful of employees—or even just one, thanks to AI—isn't as far-fetched as it once seemed. Sam Altman's conviction in this future is a wake-up call for all of us. What are we waiting for?
Thank you for sticking with us until the end. Here’s a quick roundup of some highlights we think you shouldn’t miss:
For a no-nonsense breakdown of the big tech earnings, check out this piece by
. It’s packed with key figures and insights, ensuring an informative yet enjoyable read.Stocks are getting all the love, but bonds do pay right now. In this article from
, you will learn of the different flows of money between money market funds and banks.At Sharpe Two, we’ve always had a keen interest in real estate. That’s why when an expert like
shares his perspective on the market's current state—plus offers a review of a deal accessible to retail investors—we’re all ears. Trust us; it’s a triple yes from our side.This week, we also introduced a fascinating trade in VXX that promises a Sharpe ratio of 2+. We don’t know for how long the trade will stay, but you should definitely check it out. The positive feedback has been overwhelming, and we can’t thank you enough for your support. It truly means the world to us.
Have a good week, and happy trading!
Ksander