December 2023 Market Update

At the December FOMC meeting, Federal Reserve Chairman, Jerome Powell shocked the market with the updated SEP (Summary of Economic Projections) forecast suggesting a cut to the federal funds rate in 2024 to 4.6%, and with comments about potentially cutting interest rates before hitting the 2% inflation (CPi) target. This is now known as the “Powell Pivot”.

The FOMC’s SEP forecast also suggests less than 1.9 % real GDP for the next four years and the unemployment rate rising to 4.1%. Even though this forecast represents a sluggish economy the stock and bond market love it. Stocks have risen to near all-time highs and bonds have had their best two-month rally since 1990. 10-year yields have dropped from 4.98% to 3.85%. The bond market is now pricing in seven interest rate cuts to occur in 2024. This seems aggressive but also suggests severe economic weakening on the horizon. It is odd that stocks are reacting so positively to these developments. As if interest rate cuts will occur before the economy weakens and earnings decline, not after.

Historically, the first interest rate cut by the Fed occurs as the economy and earnings are just starting to decline. This typically benefits the bond market as the stock market continues to struggle until earnings find a bottom once interest rates have declined enough to stabilize demand.

As 10-year nominal interest rates decline in response to the Fed pivot, mortgages rates have also declined. The slight inverse relationship between lower mortgage rates and increasing month over month inflation (CPi), could pressure the Fed to walk back some of its dovish comments in January 2024, and once again shock markets by removing some of the now expected interest rate cuts the stock market is counting on to support its lofty valuation.

This time could be different, but we don’t think so. We think stock investors are being given an incredible opportunity to lock in gains and reallocate capital toward assets which experience benefits during economic weakness. We believe the Fed knows the economy is weakening and is preparing the market for a potential shock. The Conference Board’s Leading Economic Indicators (LEI) has now declined MoM for 20 straight months. The yield curve has now been inverted for 18 months. Which means something in the system could break at any time, causing economic calamity and forcing the Fed to cut interest rates as their SEP forecast suggests.

MacroVex Capital believes that given the data from a variety of leading economic indicators, including warnings from the Federal Reserve and previous voting members of the FOMC, that in hindsight this could end up the most telegraphed recession in U.S. history. The inverted yield curve historically has 100% odds of predicting recession.

Our recommendation since January has been to position portfolios to endure a recession, in a defensive manor, risk off and in cash, t-bills, money market funds, fixed income duration extended in September 2023 from 0-5 year to 0-30-year U.S. Treasury bills and notes, 10-year minus 2-year yield curve re steepening and select low duration U.S. equities. Getting paid to wait for growth assets to be priced at discounts while being positioned to benefit from bond price appreciation, as interest rates decline from downward economic pressure, continues to be a prudent and profitable strategy.

We remain patient and focused on managing risk. Have a great New Year 2024.

Disclosure: Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results.

This letter is not intended to be relied upon as forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Macrovex Capital, LLC to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projection, and forecasts. There is no guarantee that any forecast made will materialize. Reliance upon the information in this letter is at the sole discretion of the reader. Please consult with a Macrovex Capital, LLC financial advisor to ensure that any contemplated transaction in any securities or investment strategy aligns with your overall investment goals, objectives, and tolerance for risk. Additional information about Macrovex Capital, LLC is available in its current disclosure documents, Form ADV and Form ADV Part 2A Brochure, which are accessible online via the SEC’s investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using CRD #300692. Macrovex Capital, LLC is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting or tax advice