mind the gaps

*4Q23 EPS Revisions. Source: Goldman Sachs. Click for larger image*

The gap between the US corporate “haves” and “have-nots” widened further in January as megacap tech earnings boosted US large cap stock indexes (Nasdaq 100 +1.9%, S&P 500 +1.7% Jan) and left the rest of the market and its sagging prospects behind (Russell 2000 -3.9% Jan).

At near-maximum exposure, TCM strategies continue to benefit from the narrow trend with Alpha Seeker (+0.4% Jan) recording its eighth positive month out of the last nine in January while and Tactical Beta (+1.4% Jan) and Tactical Q (+1.7% Jan) strategies captured nearly all of the month’s return to extend their outperformance relative to hedged equity peers during the strong rally since November. Riding the “A.I.” wave, TCM’s Hedged Disruptor (+3.0% Jan) posted another strong month in January to bring its three month return to nearly 26%.

Adding to another growing gap, developed foreign markets (MSCI EAFE +0.6% Jan) saw modest gains on the month while emerging markets (MSCI Emg Mkts -4.7% Jan) buckled under the weight of an intensifying Chinese bear market that has now dragged Chinese P/E multiples to their lowest levels in a decade and emerging market performance to 50 year lows relative to US markets, a potentially significant opportunity for long-term, value-oriented investors via TCM’s Emerging Markets Smart Index strategy.

carrot farm

In the rates markets, stronger than expected economic data in January brought higher US Treasury yields and pushed expectations for the Fed’s first rate cut from March out to May, once again nudging the proverbial easy money “carrot” just beyond the market’s reach.

More than usual, future promises like rate cuts or A.I. seem to be the market’s most valuable- and its most heavily mortgaged- asset. For example, over the last 12 months the federal government has seen fit to increase the nation’s budget deficit by $1.3 trillion in return for GDP growth of just $600 billion, or less than 50 cents of growth for every dollar borrowed. In Q4, the numbers were even worse when $834 billion of new federal debt purchased just $300 billion of GDP (36 cents per dollar). At best, accepting such tradeoffs suggests supreme confidence in the future and as the tab rises, so too does the risk when that confidence is shaken by reality.

A real-time cautionary tale of this dynamic, shares of New York Community Bank (NYCB) plummeted late in January as the bank announced losses related to its acquisition of ailing Signature Bank last March. Betting heavily at the time on Signature’s future promises (loans) in commercial real estate, NYCB has now slashed its dividend amid mounting losses on those assets, threatening to bring the regional bank crisis back just as the Fed’s “BTFP” regional bank rescue program is slated to wind down in March. While such a scenario could finally bring the rate cut carrot in reach, it might not create the kind future the market had in mind.