Beginnings January gave a gentle push to the popular indices. Despite today’s selloff, at the close the S&P 500 and the Nasdaq-100 are up +1.60% and +1.82% respectively to begin the year.
Of course, to get a more complete picture, it’s helpful to look at some other data – for example, the S&P 500 equal weight index. It’s actually down -0.87% for the year.
That signals to me the “Magnificent Seven” [Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla] continues to throw its weight around disproportionally, accounting for the vast majority of the strength in the market.
In addition to marking the start of the year, January saw a few additional beginnings worth noting:
Of course, to get a more complete picture, it’s helpful to look at some other data – for example, the S&P 500 equal weight index. It’s actually down -0.87% for the year.
That signals to me the “Magnificent Seven” [Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms, and Tesla] continues to throw its weight around disproportionally, accounting for the vast majority of the strength in the market.
In addition to marking the start of the year, January saw a few additional beginnings worth noting:
- The S&P 500 began a new bull market. There are two ways to define a bull market: 1) when an index rises 20% from its most recent low (it did that last year), and 2) when an index surpasses its previous high, which it did on Monday, January 22.
- For the first time ever, investors can now buy and sell bitcoin as easily as stocks and mutual funds. They can do so through 11 different so-called “spot ETFs” which hold stores of bitcoin and track the actual price of the cryptocurrency. Whether this will prove to be a blessing or a curse, time will tell.
- Amazon’s flagship subscription service, Amazon Prime, has begun serving its customers ads during their favorite TV shows and movies. Don’t want the climatic fight scene of Jack Reacher interrupted by an ad for a weight loss product? Well, that will cost you an additional $2.99/mo.
- The first Neuralink product called “Telepathy” was successfully implanted into a human. The brainchild of Elon Musk, the brain-computer interface transmits electrical and chemical signals in the participants’ brains, enabling control of a phone or computer just by thinking. Right now, I’m thinking great potential - and scary dangerous.
How is February shaping up?
Just today, at the end of their 2-day FOMC policy meeting, the Federal Reserve left interest rates unchanged, as was widely expected. Beyond that, it’s all nuance and investors reacted along their preconceived notions. To wit:
- The Fed’s policy statement dropped a longstanding reference to possible further hikes. Yay!
- The risks to meeting both the employment and inflation goals "are moving into better balance," the Fed said. Yay!
- So, are rate cuts imminent? Not so much. The Committee "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%." Boo, hiss.
When the dust settles after a day or two, and investors have a chance to reset their expectations as to the timing of the first rate hikes (down from March to maybe June or July), I suspect the Fed influence will be relatively benign for February.
So, what will influence markets in the next month?
Earnings, for sure. This week and next will see a critical mass of quarterly earnings reports from those influential tech giants, and many others. The market leaders are priced for perfection, and meeting and beating expectations, or underwhelming investors, will largely dictate the direction of the market in February. Buckle up.
Wild cards remain. Geopolitical risks are top of mind; heightened trade tensions with China, the ongoing conflict in Russia and Ukraine, and a possible escalation of the hot war in the Middle East.
Finally, there’s psychology. Should we be at least a little bit nervous that investor sentiment has so thoroughly baked in a “soft landing” scenario? Probably. Certainly that soft landing may come to pass. But too much confidence can make the markets more vulnerable to overcorrections - especially when market gains have been concentrated in such a small group of market leaders.
All that said, the momentum that propelled us into the New Year remains strong, even if it’s primarily an AI momentum. I am cautious optimistic of our odds going forward.
“Markets are pricing a soft economic landing where inflation falls to 2% without a recession. With markets tending to focus on one theme at a time, this narrative can support the rally over our tactical horizon and allow it to expand beyond tech. So we go overweight overall U.S. stocks.” – BlackRock Investment Institute, January 29, 2024
And For What It’s Worth…
According to The Week, a Chicago man has filed a $75 million lawsuit against 27 women whom he claims disparaged his dating style in a private Facebook group. Nikko D’Ambrosia, 32, alleges the women used the group “Are We Dating The Same Guy?” to spread “malicious lies” about him, including one woman’s claim that he was “very clingy.” Such comments, D’Ambrosia’s lawsuit states, are “intolerable in a civilized society.”
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
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* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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