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Navigating the Fed's New Tone

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at
  • 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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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Marketing Lead

Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Head of Communications and Strategy

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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