Fed Minutes, Surging Spending, and Smart Moves in Risk-Off Trades

January 4, 2024
By Vlad Karpel

Analyzing Current Market Conditions: Fed Policy, Spending Trends, and Strategic Insights for Investors

RoboStreet – January 5, 2024

Stocks closed with a mixed performance on Thursday, marking a four-day downturn for the S&P 500. The previous day witnessed a decline in stocks despite the release of the Federal Reserve’s December policy meeting minutes. Fresh data revealed a continuous drop in manufacturing activity, along with a slight dip in job openings for November. Concurrently, Treasury yields fell to 3.905%, and crude oil futures rose due to turmoil in the Middle East.

In the December FOMC meeting minutes, officials reached a consensus that the rate-increase cycle, initiated in 2022, was likely concluded. Factors such as easing inflation, normalized supply chains, and a more flexible labor market influenced this decision. Concerns were expressed that pushing interest rates above 5% had subdued consumer demand, contributing to a softening of inflation. While the timing of rate cuts was not discussed, officials projected three rate cuts for 2024. Additionally, discussions were anticipated regarding slowing and eventually halting the reduction of the central bank’s bond holdings.

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Bank of America’s credit and debit card data revealed increased spending by Americans at the end of the recent year compared to the previous one. Preliminary Mastercard SpendingPulse data supported this, showing a 3.1% rise in holiday season spending (excluding car sales) from November 1 to December 24. This spending surge occurred despite ongoing inflation pressures.

Economists predict the addition of 160,000 jobs in December, indicating a moderately healthy labor market. The previous months saw the addition of 199,000 and 150,000 jobs in November and October, respectively. The monthly jobs report typically influences market reactions, with a stronger-than-expected report potentially pushing equities lower and signaling the possibility of earlier interest rate cuts by the Federal Reserve.

Concerns about a rough economic drop in 2024 were underscored by disappointing earnings from $WBA. This, coupled with the pullback in markets, led to declines in sectors like SMH, XLI, and QQQ, which faced medium-term support challenges. The 10-year yield and $DXY rebounded, putting pressure on the equity market.

Oil prices rebounded due to geopolitical risks in the Red Sea, particularly involving Houthi rebels, given that 10-15% of global oil shipping passes through this region. Bitcoin experienced a significant reversal, suggesting a potential end to the risk-on trade.

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Market sentiment leans towards the belief that the Federal Reserve has completed its rate hikes for the current and next year, with a high probability of interest rate cuts in the first half of 2024. Many consider this bullish for the market, though any challenge to this narrative could prolong the sell-off, especially for the “magnificent 7” stocks.

Several downgrades on AAPL, coupled with approaching the 200 DMA, raise concerns about the Fed delaying interest rate cuts in the first half of 2024. Predictions suggest the SPY rally may be capped at $470-480 levels, with short-term support in the range of 400-430 for the next few months. For reference, the SPY Seasonal Chart is shown below:

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While patterns of higher highs and higher lows may emerge in the coming weeks, there is a belief that the best part of the rally is likely behind us.

Looking forward, a catalyst is needed for the market to move higher. Short-term pullbacks are expected, but as long as the majority sees no signs of a recession, the market is anticipated to grind higher, maintaining a pattern of higher highs and higher lows into the next year.

With this in mind, the emergence of risk-off sentiment is evident, influencing certain trade choices. Notably, assets like $IWM (representing the Russell 2000 Index) and $ARKK (an ETF managed by ARK Invest) are gaining attention as potential favorable investments.

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$IWM, reflecting small-cap stocks within the Russell 2000, often responds positively to risk-off environments. Given the recent pullback in markets and concerns about a potentially challenging economic landscape in 2024, investors may find small-cap stocks appealing as they tend to exhibit resilience during periods of market uncertainty. These stocks are perceived as having a greater growth potential, making them attractive in times when larger, more established companies may face headwinds.

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Similarly, $ARKK, an ETF managed by ARK Invest, focuses on innovative and disruptive companies across various sectors. The fund is known for its active management style and investment in high-growth, forward-looking companies. In the context of the discussed market dynamics, $ARKK presents an intriguing option as investors seek exposure to innovative industries and technologies that could thrive despite broader economic challenges.

The rationale behind considering these risk-off trades stems from the belief that smaller-cap stocks and innovative companies may offer a level of diversification and resilience amid uncertainties. Additionally, their potential for growth could present opportunities for investors seeking to position themselves strategically in the current market landscape.

The appeal of risk-off trades, such as $IWM and $ARKK, is grounded in their perceived resilience and growth potential in the face of evolving market conditions discussed in the broader article.

And that is what the power of AI can do for us, as well as for members of our RoboInvestor stock and ETF advisory service. Our proprietary AI platform identifies trades with a high probability of profits and cuts out all the noise and emotion that typically drives investor behavior.

We email subscribers an online newsletter every other week, over the weekend, that includes my fundamental commentary on the market landscape, a technical read on near-term market direction, an update on current positions, and one or two new recommendations to act on when the market opens Monday. 

RoboInvesetor is an unrestricted investment service, in that I may recommend blue-chip stocks or ETFs that represent the major indexes, market sectors, sub-sectors, commodities, currencies, interest rates, volatility, and shorting opportunities through the use of inverse ETFs. Our model portfolio will hold between 12 and 25 positions, depending on market conditions. Lately, we’ve been entirely more cautious with a smaller number of stocks and ETFs. 

Our track record is one of the very best in the retail advisory industry, where our Winning Trades Percentage is at 88.18% going back to April 2018. 

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As we step into 2024, investors are confronted with a complex market scenario shaped by elements like inflationary forces, evolving Federal policies, and persistent geopolitical tensions, such as the ongoing conflict in Ukraine. Successfully maneuvering through this intricate landscape demands a dependable and well-informed investment platform. This is where RoboInvestor proves its worth, acting as a reliable ally by providing a spectrum of invaluable resources and expert guidance. With RoboInvestor at your service, you can adeptly oversee your portfolio and capitalize on lucrative opportunities within the dynamic and fast-paced market environment.

Whether you are a seasoned investor or just starting out, our team is here to help you every step of the way. Don’t face the challenges of tomorrow alone–join RoboInvestor today and take your investing to the next level.

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“I’m investing my own money in each and every stock as my AI platform identifies.”

And remember we’re not talking about day trading here. I’m looking for 50-100% gains within the next 3 months, so my weekly updates are timely enough for you to act.

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*Please note: RoboStreet is part of your free subscription service. It is not included in any paid Tradespoon subscription service. Vlad Karpel only trades his own personal money for paid subscription services. If you are a paid subscriber, please review your Premium Member Picks, ActiveTrader, MonthlyTrader, or RoboInvestor recommendations. If you are interested in receiving Vlad’s personal picks, please click here.

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