The FOMC kicks off its first monetary policy meeting of the year this morning with a decision tomorrow, but with universal agreement that there will be no change in rates, what Chair Powell says in his 2:30 PM ET press conference will be the primary focus of investors around the world.  Some would have you believe that the prospects for the market this year rest entirely on Powell’s words, so that if he’s dovish, there’s hope for the bulls, but if he comes out as hawkish, all hope will be lost.

A hawkish tone by the Fed Chair would likely be seen as a negative short-term development for the market, but at the same time, the relationship is not as binary as many seem to believe. The chart below compares the performance of the S&P 500 to the market pricing for the probability of a rate cut at the March meeting (based on Fed Fund Futures) since last October.  While equities bottomed and started to rally in late October, it wasn’t until late November that the odds for a rate cut in March started to increase and move out of their range (red-shaded area).  By that time the S&P 500 was nearly 10% above its low and 3.5% above the high end of its October range.  From late November through late December, both the S&P 500 and the odds of a rate cut rose in unison with each other, but pricing for a March rate cut peaked on 12/22.  On that day, the S&P 500 closed at 4,754.63, and since then, the odds of a March cut have been cut in half to 44.6%.  Over that same period, the S&P 500 is up over 3.5%. If the Fed was driving the bus, how come the market hasn’t been going along for the ride lately?

Today’s data slate was light with the only release of note being the Dallas Fed’s monthly manufacturing survey. The results were disappointing to say the least as the headline number came in at -27.4, more than twice as low as expectations of -11.8.  The huge miss relative to forecasts is not exactly new though.  Earlier this month, the Kansas City survey and New York Fed survey likewise came in well below estimates.

Using data from our Economic Indicator Database, below we show the average spread between the actual release value and economist forecast of each regional Fed manufacturing survey (Empire, Philadelphia, Richmond, Kansas City, and Dallas) since 2011. As shown, this January has seen outright massive misses.  Only two other months have seen readings disappoint to wider degrees: December 2018 and March 2020. In tonight’s Closer we will provide an updated look at our Five Fed Manufacturing Composite which creates a composite of each of these reports to gauge national manufacturing activity.

Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market-related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.

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On This Day in History:

Warren Buffett’s Investment Protégé Grew His Retirement Fund From $70,000 To $264 Million — An Account He Opened When He Earned Just $22,000 Per Year: ‘In A Perfect World, Nobody Would Know About This Account’ (Yahoo Finance)
When he was 22 years old in 1984, Ted Weschler was making $22,000 a year. He opened an IRA and grew it to $70,000 five years later. Weschler left his job as a junior financial analyst started a private equity firm, and then launched a hedge fund in 2000 that delivered a compounded annual return of 22% until 2011. He joined Berkshire in 2012, Throughout his career, and by 2021, that $70,000 exploded to $264 million. Aside from his stock picks, Weschler called on the value of investing in index funds over the long term, especially for average investors over the long term. [Link]

83% of Warren Buffett’s $365 Billion Portfolio Is Invested in Just 7 Stocks (Yahoo Finance)
Buffett has holdings in 50 stocks, give or take, but the vast majority of his equity portfolio can be boiled down to just seven. If you zoom in even further, almost half of the invested assets are in one name – Apple (AAPL). Toward the bottom of that top seven is Coca-Cola, Chevron, Occidental Petroleum, and Kraft Heinz, each reflecting Buffett’s preference for companies with predictable cash flows, strong market positions, or potential to benefit from economic trends. Check out the article for the top stocks! [Link]

AI & Technology

California could require car ‘governors’ that limit speeding to 10 mph over posted limits (San Francisco Chronicle)
California State Senator Scott Wiener has introduced a bill that would make California the first state to mandate “speed governors “in new vehicles.  Starting with the 2027 model year, these speed governors are a new technology that would restrict vehicles from exceeding 10 mph over posted speed limits, a measure intended to address the rising traffic fatalities in California and the Bay Area. The technology can use GPS or cameras to control speed based on where the car is, therefore knowing the posted speed limit and adjusting the max speed accordingly. [Link]

Netflix Co-CEO Calls Vision Pro ‘Subscale’ and Wonders if Anybody Would Actually Use It (Gizmodo)
Netflix has decided not to develop an app for Apple’s upcoming Vision Pro VR headset, priced at $3,500. Co-CEO Greg Peters expressed skepticism about the device’s relevance to their members, labeling it as “subscale.” This cautious approach reflects Netflix’s strategy to invest in technologies that yield significant returns. After all, the approach has historically been to build, not buy according to Netflix’s earnings call this past week. Others like Spotify and YouTube are also not planning Vision Pro-specific apps at launch. Despite Apple’s reported strong pre-order sales for the Vision Pro, Netflix and others are hesitant to commit resources to a platform that may not achieve widespread use. [Link]

Energy & EVs

US Wind Power Is Slowly Making a Comeback After Hitting Rock Bottom (Bloomberg)
After reaching a low point last year, the US onshore wind sector is experiencing a gradual revival, largely due to new tax incentives introduced by the Inflation Reduction Act (IRA) and increased demand. Despite challenges like inflation, higher borrowing costs, and supply chain disruptions, which limited installations to just 7 gigawatts in 2023, the sector is expected to see growth, with projections of installing 8.4 gigawatts in 2023 and nearly 20 gigawatts by 2030. [Link]

Lithium price plunges on slowing Chinese demand for electric vehicles (Financial Times)
Lithium miners are scaling back production and expansion plans due to a drop in lithium prices and slowing demand for electric vehicles, particularly in China. The price of lithium has fallen sharply, creating a surplus and challenging the profitability of mining companies. Major industry players like Pilbara Minerals and Albemarle are reducing costs and revising their strategies, while the Australian government is concerned about the impact on the local mining sector. Analysts suggest that China might use this downturn to increase its influence in the global lithium market, even as the market remains volatile and sensitive to demand and supply changes. [Link]

Political Turns

Orbán backs Sweden’s NATO bid in sudden U-turn (Politico)
Hungarian Prime Minister Viktor Orbán has now expressed support for Sweden’s bid to join NATO, promising that Hungary’s parliament will approve the application at its earliest opportunity. Hungary’s stance comes after Turkey ratified Sweden’s NATO membership, despite Hungary previously promising not to be the last to ratify Sweden’s bid. Orbán’s support was confirmed in a tweet and during a call with NATO Secretary-General Jens Stoltenberg, who welcomed Hungary’s position. The Hungarian parliament is expected to vote on this matter when it reconvenes in mid-February. [Link]

A new global gender divide is emerging (Financial Times)
As Gen Z ages into adulthood, genders are diverging on political and ideological beliefs as women lean more liberal and men lean more conservative. This gap, evident in countries worldwide, has widened rapidly in recent years. Key triggers like the #MeToo movement have intensified feminist values among young women, while young men’s views are drifting in the opposite direction. The role of technology and social media also plays a part, in influencing the beliefs and feeding content to users based on their interactions and subjects of interest. [Link]

Health & Wellness

Obesity Drugs Lead to Muscle Loss—Pharma Companies Want to Fix That (WSJ)
Weight-loss medications like Wegovy and Zepbound are gaining popularity due to their effectiveness and potential to reduce health risks. However, there are concerns that these medications may lead to muscle-mass loss, which could increase injury risk and slow down metabolism, potentially leading to regaining weight when patients go off the treatments. To counter this, companies like Eli Lilly are exploring combinations of GLP-1s with other medications to preserve muscle mass during weight loss. [Link]

Stanley Frenzy

Woman arrested after allegedly stealing $2,500 worth of Stanley cups (NPR)
Well, the Stanley hype has officially gone too far. A 23-year-old woman was arrested in California for stealing a trunk full of Stanley water bottles. The police responded to a shoplifting incident where the suspect reportedly filled her car with the stolen merchandise. Upon being apprehended, authorities found 65 Stanley products valued at around $2,500 in her vehicle. The social media trend for these water bottles has spiraled into overnight camping for limited edition models and sky-high resale prices online. We’re talking hundreds of dollars for each bottle! [Link]

Labor

Wayfair Layoffs Focused on Remote Workers (WSJ)
Recent layoffs at Wayfair disproportionately affected remote employees. The company has cut about 13% of its workforce after a pandemic boost turned into going “overboard in hiring.” Wayfair executives say that most people should be at the office working in person, on most days, following a broader trend in return-to-office culture. By the sounds of it, Wayfair is having some productivity issues, and the layoffs suggest that might be a result of remote work. [Link]

The Labour Market Effects of Venezuelan Refugee Crisis in the United States (Wiley Online Library)
With immigration being a huge area of debate in the US and for the upcoming 2024 election, this article analyzes the recent influx of Venezuelan refugees in the US, noting their high education level and preference for settling in Miami and Orlando, Florida. These choices are influenced more by proximity and climate than local labor market conditions. According to the study, there were no adverse effects on employment rates or wages of US citizens in these cities. [Link]

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Within the blue-chip S&P 100 (the largest stocks in the US), there are currently ten stocks that are up at least 40% over the last two years and 20% over the last three years.  Below is the list of these names sorted alphabetically.  For each stock, we also include its market cap, its dividend yield (if it pays one), its next-year estimated P/E ratio, and of course, its 2-year and 3-year percentage change.

On average, these ten stocks have a dividend yield of around 1% and a forward P/E ratio of 27.9.  Over the last two years, they’ve averaged a gain of 86.5%, while they’ve rallied an average of 123.7% over the last three years. While stocks like Advanced Micro (AMD), Broadcom (AVGO), and NVIDIA (NVDA) made the list, it’s not all Tech stocks.  It also includes names like Costco (COST), General Electric (GE), Eli Lilly (LLY), and T-Mobile (TMUS) made the list as well.

While the NVDA’s and Eli Lilly’s (LLY) of the investment world have been on fire recently, there are also plenty of well-known blue-chip stocks that have been beaten down over the last few years.  You can probably name a few off the top of your head, but below is a list of the eleven stocks in the S&P 100 that are down at least 20%+ over each of the last two and three years.  This list is a who’s who of big-name companies that have been taken to the woodshed since early 2021.  It includes names like Disney (DIS), General Motors (GM), 3M (MMM), Nike (NKE), Pfizer (PFE), Target (TGT), Tesla (TSLA), and Verizon (VZ).

A good thought exercise is to decide where you would rather put new money to work in the equity market right now.  Would you go with the ten big winners above that have seemingly endless upside momentum, or would you rather go with the beaten-down blue-chips below that can’t seem to get out of their way?  Of the two baskets, which do you think will outperform over the next year; the next two years; or the next three?  We have our own opinion on the topic here at Bespoke, but the basket you decide on probably speaks volumes about the type of investor you are as well.

After the close yesterday, the first update on short interest readings of the new year with data through January 12th was released. As we noted at various points earlier this year, breaking down the Russell 1,000 into deciles shows that by far the worst performing stocks this year have been those that entered the year with the highest short interest levels. As shown below, the 10% of stocks in the Russell 1,000 that began the year with the highest short interest as a percentage of float are down an average of 8.18% YTD.  That compares with an average gain of 1.11% for the decile of the least shorted names. While all other deciles have also fallen so far to kick off the new year, their losses are not nearly as large; mostly in the low single digits (across all Russell 1,000 members, the average year to date decline is currently 1.6%).

Breaking things down by industry further illustrates the story. As shown in the first chart below, the industry groups that currently have the highest degrees of short interest through mid-month are retailers, autos, and durables and apparel stocks.  Those are also three of the sectors that have averaged some of the largest declines year to date.  In fact, autos is down the most with an impressive 11% decline.

Meanwhile, insurance, utilities, and banks typically have the lowest levels of short interest.  Performance is a bit more mixed here, but the group with the lowest average short interest reading, Insurance, is also the industry whose stocks have averaged the largest move higher so far this year.  In fact, it is actually one of the few areas of the market to be sitting on a gain.  As for Utilities, while also possessing low levels of short interest, the average stock has posted a large 5.3% decline.

Between this first short interest report of the year and where things stood at the end of last year, the average Russell 1,000 member did in fact see short interest rise marginally.  In the table below, we show the 25 members that saw the largest increases. At the top of the list is recent IPO Instacart/Maplebear (CART).  At the end of last year, short interest was already elevated at almost 29% of float. Since then, shorts have continued to pile in. Now over 40% of float is short, the most of any Russell 1,000 member.  Ironically, in spite of the general underperformance of highly shorted names year to date, CART is actually headed into the final days of January up 5.67% in 2024.  The next largest increase came from mobile game maker Playtika (PLTK). Short interest for this company has risen from just under 9% up to 15.4%.  Unlike CART, this stock has experienced worse performance this year with a 13.5% decline.  Of the list below, that is some of the weakest performance albeit there are far worse declines and higher current levels of short interest. Lucid (LCID) and Medical Properties (MPW) have seen declines of 30%+ YTD and more than a quarter of their float is shorted.