Should investors prepare for tail outcomes in 2025?
The NASDAQ fell 3% on Monday following reports of Chinese AI advancement on lower development costs. While the data and narratives out of China are often lacking the full truth, it does represent a crack in the narrative that limitless power and AI infrastructure are requirements to successfully scale AI. NVIDIA fell 17% on the day and the entire AI supply chain universe was down double-digits. NVIDIA bounced 6% the following day but has given up these gains to trade back near the lows. However, other leading AI equities are making sizeable retracements toward their previous highs. While very early, this might be the first time NVIDIA showed this kind of weakness in a down market and then failed to participate during the subsequent rebound.
The S&P 500 managed to post a 1.35% price gain in the November 19 to January 19 window. This falls in the mixed bag outlook with 63% of the time having positive forward one-year returns and an average gain of 6%. 27% of the time the market was down over the following year and in every instance the S&P 500 declined in February. So, a positive February likely paints a favorable outlook when paired with a positive January.
- There have been four previous instances of the S&P 500 posting back-to-back 20% gains.
- Three showed materially weak performance in the forward 24-month period.
- One, the tech bubble, saw the S&P 500 double over the next three years.
- Maybe tail outcomes are more likely as opposed to a growing consensus for mean outcomes.
The Federal Reserve Leaves Interest Rates Unchanged
The Federal Reserve left the Federal Funds rate unchanged during its January meeting. It was the first pause following 100 basis points of cuts over the previous three meetings. The press conference leaned toward the view that no immediate cuts should be expected. Fed Chair Powell noted that they are in no rush to reduce rates further. The market had a mini freakout when the press release omitted a sentence that was in the previous statement. Reporters were quick to address it, and Powell said it was just clean up and not a change in monetary policy outlook. The VIX is now down 15% from that brief pop and equities are slightly higher. With the Fed out the way, investors will focus on earnings from big technology companies over the coming days.
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Sources: BTC Capital Management, Bloomberg
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