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The Macro Situation
Santa Claus effect (noun):
- the positive knock-on effect of the holiday-time rally which tends to persist until the end of the year;
- the astonishment and disappointment when realizing Santa Claus does not exist;
- the astonishment and disappointment when realizing economic booms are always followed by economic busts.
― New Entry in the Updated Devil’s Dictionary
Yuletide euphoria?
In the short week for markets, optimism and trading finished 2023 as if “recession” was an out-of-fashion term or an anomalous blip on the economic radar screen. Though down on Friday, the S&P 500 gained 24% on the year.
2024 may not be any different, with analysts expecting a return to normal economic conditions or possibly a mild downturn.
Or . . . it might be terribly different.
David Rosenberg (a perma bear) is calling the soft landing “the calm before the storm.” Historically, it’s not only the case that soft landings have preceded hard recessions (1969, 1979, 1989, 2000 and 2007), but underlying the current macro situation is a mess of potential factors.
- Unresolved issues with Chinese debt and property
- Japanese monetary policy
- The poor health of European economies
- The fragility of the US bond market
- The record-high US overnight funding rate for bank borrowing
A Statista study of the difference between the 10- and 3-year treasury yield, which the New York Fed uses, predicts a high degree of probability for recession in the run-up to November 2024.
[Note the error in the graph: Nov ‘23 at the end should read Nov ‘24.]
Crude oil (71.33) prices eased as worries about attacks in the Red Sea have abated due to redoubled security efforts by a US-led multinational operation.
Gold (2071.80) neared its highest level in months in the wake of a weak US dollar (101.38). Its price slipped at the close of the week but still reflects the interest in precious metals as a hedge against an anticipated weakening dollar.
The Santa Claus effect brought a short-lived spike for the 10-year US Treasury yield on Thursday. Though overall, it continues its descent. It closed at its lowest level (3.87%) since August 2023 (3.85%). With the expectation that the Fed will introduce three rate reductions (25 bps each), yields may surge once again as money typically moves back into stocks when the market is less uncertain.
- Todd Mei, PhD & Sebastian Purcell, PhD
AI Sentiment Report
The following sentiment scores use ChatGPT as part of the AI tech stack to track sectors as leading indicators. (Lesson 4 of The Art of The Bubble covers the selection of lead indicators for bubble trades). The scores are most indicative for the next day of trading (a Monday), but they appear to set the general tone for the next week.
The methodology employed is based on this peer reviewed academic article, which produced 550%+ results in back tests over a 2 year time frame. We consider 4 and 5 scores to be positive, but please bear in mind that the AI model is still in its validation phase.
-The Research Team:
Dom Viera, Samantha Russell, Nicole Zinuhova, Aiza Malik
Free Stuff!
Just a reminder: Discord snapshot for the Holiday Airdrop will be at noon January 1st EST.
Happy New Year!
-The Team
The 1.2 Labs Edge
Our paid plans make use of the same base algorithm that our hedge fund, 1.2 Capital Management does, but modified in timeframe so you don’t have to stare at your screen all day.
Below are two of our data service offerings for stocks. The Bubble Portfolio has never had a down year and the Leveraged Portfolio should be 3x the QQQ (so negative), but it’s outperforming by better than 12%.
This newsletter is provided for educational and entertainment purposes only and should not be relied upon for business, investment, taxation, or legal advice. You should consult your own advisors for those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by 1.2 Capital Management. (An offering to invest in a 1.2 Capital Management fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation--all of which should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by 1.2 Capital Management, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
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