January 2024 Update

January, 2024

Party like it's 1999? (Just remember what happened after)

World markets rose strongly in the last 2 months of the 4th quarter. Investors jumped on words from Fed Chair Jay Powell which seemingly indicated interest rate cuts are imminent. In the 2 months November and December c.US$20 trillion was added to the value of world bond and equity markets. Everything was well bid: equities, bonds, Alts, Crypto.

"Party on dudes"? (ack - Bill and Ted's Excellent Adventure).

We did post at end October that the chances of a bounce were high recommended staying invested in equities given the bias to "growth" aka inflation that was prevalent in policy settings, and that equities were a decent hedge against continued attempts to keep the asset souffle aloft. https://www.delftpartners.com/news/views/nov-2023-darkest-before-dawn.html

The data do not indicate a weakening US economy, so the statement by Chair Powell appears strange unless something is worrying the Fed which markets do not wish to address, or do not yet see? If so, our guess would be that it's the regulatory capital buffers and balance sheets of mid and small banks which alarm policy makers. These are/were burdened both with carrying value losses on bond holdings and a deteriorating commercial real estate market.

Europe's economy IS weak, and we would expect the ECB to cut rates given half a chance. Inflation there however is further from the peak than it is in the USA, which makes rate cuts dangerous.

Note that in neither place will prices likely fall. Stubbornly high prices for goods and services will crimp consumer spending already constrained by mortgage debt loads.

Despite China's economic problems, it is interesting to note the resilience of the commodity complex. Iron Ore prices rose strongly although oil did not despite the recurrence of Middle East 'troubles'.

Over 70% of stocks in the S&P500 underperformed the index in 2023 - a record. Such a narrow market can either decline from here or broaden out. We recommend investors look at the Russell 2000, or an equal weighted S&P500, as attractive investment alternatives to slavishly following the cap weighted index, the S&P500.

Finally, just remember what happened after the euphoric party atmosphere of 1999. There was a sell off but more importantly a serious and for some, profitable, rotation to Value stocks away from the fashionable Internet plays.

Stay away from concept stocks, loss making entities, and be wary of locking your money up. Favour companies that meet needs over wants.

We remain underweight the so called 'Magnificent 7' and this remains the most significant source of our active risk in the global strategies relative to their benchmarks.

Trades were made as elevated cross-sectional volatility gave rise to more than usual relative mis pricing. We sold Home Depot, Williams Sonoma, Texas Instruments, and LKQ, trimmed KLA, Advantest, Honeywell and reinvested in Emcor, Vistra, and added to NGK Insulators, Kao corporation, and HCA.

Delft Partners January 2024