December 15, 2024
4Q24 Highlights
In one of the most counter intuitive market actions observed lately, interest rates spiked materially in 4Q24 despite the FED beginning its rate cutting cycle as recently as September 18, 2024. These head scratching moves were induced by stronger economic and inflation data that the market assumed would force the FED to dial back its interest rate cut expectations for 2025.
Indeed, that assumption was validated by the FED at its last 2024 meeting on December 18. In the interest rate “dot plot” projections for 2025 released along with its rate decision of another 25 bps cut, the median estimate of 3.75% was even higher than the lowered market expectation of 3.50 - 3.25 bps.
2Y Treasury yield ended the quarter up +62 bp while the 10Y yield ended up +83 bps. Interestingly, the 10Y-2Y spread widened another 21 bps but this time due to the longer end selling off more than the shorter end. Market appears to be concerned that inflation may have bottomed out and likely trending upwards.
4Q24 Market Snapshot
Apart from the interest rate action mentioned above, other notable moves included Volatility Index (VIX) for stocks declining even as riskier segments like Small-caps and Emerging Markets (EM) sold off a bit. EM’s drop of ~ 8% was driven also by the election victory of Donald Trump who has expressed his intent to use America’s economic leverage to strike favorable bilateral trade agreements. Similarly, enjoying Trump’s explicit support, cryptos rallied with Bitcoin up a stunning 54%! Lastly, Natgas and crude oil divergence continued again this quarter with colder weather forecasts aiding natgas’ rise while oil fundamentals remained lukewarm.
Performance Review
All OppoQuest strategies materially outperformed their respective benchmarks again this quarter with MODERATE and CONSERVATIVE strategies outperforming for five consecutive quarters now and the GROWTH strategy outperforming in four of the last five!
Significant positive contributions to the performance came from:
· Palantir (PLTR) - whose Artificial Intelligence Platform (AIP) continued to gain wider acceptance by enterprise customers
· Marvell (MRVL) – after significantly raising its earning guidance driven by strength in its AI related data center products
· GE Vernova (GEV) – whose positioning within the major energy trends like decarbonization and electrification got further recognition
· Warner Bros Discovery (WBD) – after management reported moves that implied a breakup of linear TV business is under consideration
· EQT Corp (EQT) – on continued positive momentum from higher natgas prices due to solid fundamentals
Outlook
Post U.S. elections, our outlook has changed to being optimistic again. With our earlier concern of spiking oil prices due to escalating hostilities in the middle east having largely faded, we now see inflation resurgence as the most likely near-term risk factor given the incoming administration’s pro-growth orientation and probable imposition of tariffs on some large trading partners.
Markets seem to have largely priced in the above risk as indicated by a dramatic reduction in interest rate cut expectations. The chart below from CME shows participants now pricing in
highest probability of only one rate cut in 2025. Recall that only about six months ago, expectations were for at least 100 bps of cuts in 2025. Moreover, 10Y yields have risen almost 100 bps since the FED started cutting rates on September 18. Despite such negative action, risk assets in general have not given up much ground although we do note that US Small-caps and Emerging Markets have corrected a bit in the last few weeks. The question we have been asking ourselves is whether the US economy can achieve decent economic growth (~3%) if interest rates stay higher (10Y at ~ 5%) for longer?
If rates stay higher for longer then, clearly some sectors of the economy that are interest rate sensitive (like housing) will continue to struggle. But there is little evidence to suggest that areas like Technology (AI spending is projected to be in Trillions over the next few years) are slowing down. Even some consumer sectors like travel (Delta Airlines raised guidance for 2025 after the quarter ended) continue to show robust growth. Another hugely encouraging data point was the December NFIB small business sentiment survey that also came out in the new year. It shows sentiment to be most optimistic since the difficult days of COVID. Some of the survey components are at multi-year highs!
So, while we understand the natural tendency of investors to be cautious if rates are going to stay higher for longer, we do think the economy can achieve decent growth despite higher rates. Our answer to the question we posed earlier is YES! Therefore, we are again looking to add risk but only opportunistically – our current allocation of 70% to equities gives us enough exposure to participate on the upside.
Sincerely,
For OppoQuest
PARESH JAIN
Managing Member & Portfolio Manager
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