Fed Uncertainty, Inflation Back in Focus, Government Shutdown?
Micron's guidance and Friday's Quadruple Witching
Following yesterday’s dramatic post-Fed policy meeting sell-off that pushed the S&P 500 even deeper into short-term oversold territory, futures point to a comparatively modest rebound when equity markets open later this morning. That late-day sell-off came even though the Fed delivered on market expectations for a 25-basis point rate cut and updated economic projections that included a more vibrant GPD forecast, a slower pace of progress on inflation, and two 25-basis point rate cuts next year, down from in the September projections.
What weighed on the market and sent the Volatility Index (VIX) soaring more than 70% higher was the perceived ambiguity over when the Fed may deliver 2025 rate cuts. Fueling that timing uncertainty, Fed Chair Powell reiterated his recent message the Fed will be more cautious about further rate cuts. So while the market got what it wanted, it also received a fresh bout of uncertainty, something it is no fan of.
While this could be setting up a similar market situation we saw in early August and early September, it also means we and other market watchers will continue to focus on incoming data, especially for inflation. During his afternoon press conference, Powell clearly stated the central bank really wants to see more progress on inflation, especially with year-over-year figures, before delivering additional rate cuts.
The next set of inflation data comes later today, but that will be the third and final look at PCE Price Index data for Q3 2024. The next batch of fresh inflation data will be released on Friday when the November PCE Price Index data is published. Market expectations see the headline PCE Price Index rising to 2.5% from 2.3% in October and the core figure for November is expected to tick higher to 2.9% from 2.8% the month before.
Because we are fresh from the Fed meeting, higher-than-expected figures will lead to more speculation of rate cuts coming later in 2025. However, should we see a meaningful surprise lower with the November figures that could be enough to bring the market out of this current funk. Friday is also one of the four “Quadruple Witching” days in the market, which means we will see the simultaneous expiration of stock index futures contracts, single-stock options, options on stock-index options, and stock index options. These days tend to have greater than usual volatility and volume as traders close out or extend their positions.
Adding another layer of pressure to the Tech sector this morning, guidance from memory company Micron (MU) came up woefully short, laying the blame on PC and smartphone markets even as its customers are working down excess inventory levels. Micron’s data center revenue grew 400% year over year in its November quarter, and orders for those products remained strong. By spring 2025, Micron anticipates a rebound in demand outside its data center market and forecasts the PC market to rise 5% in 2025.
To the mix, we can also add uncertainty as to whether a government shutdown will be averted later this week. If measures to keep the government open fail, a partial shutdown could begin as early as Saturday. But if the legislation passes, it will kick the next funding fight until mid-March. Complicating matters, President Trump and team are pushing for a streamlined spending bill to increase the debt ceiling.
While we will have our Weekly Thematic Reads email coming your way tomorrow and another edition of Sunday Funday over the weekend, we will see you next on Monday, January 6 with our first Week Ahead video for the new year.
From all of us here, we wish you a Merry Christmas, Happy Hanukkah, Happy New Year, and Happy Holidays! See you before you know it.
Model Musings
Aging of the Population
“Retirement industry insiders say they expect Congress to work next year toward a third installment of the SECURE Act focused on expanding retirement security. The legislation would be the third installment of the historically bipartisan SECURE Acts, which Congress passed in 2019 and 2022 respectively, creating significant changes to Americans’ retirement and estate plans… DOL officials, lawmakers and industry executives “want to try to make it easier for the assets to automatically follow people around as they go from employer to employer or employer to IRA.” Read more here
“This Lunar year, the year of the dragon, is seen as an auspicious one for marriage and births in Chinese culture. Nonetheless, 2024 births are expected to drop below 8 million, less than half the number in 2015, the last year of China’s one-child policy. China’s fertility rate is hovering just above one birth per woman, well below the 2.1 needed to maintain a stable population.” Read more here
Artificial Intelligence
“Only eight percent of U.S. government employees are utilizing generative artificial intelligence (AI) on a daily basis for their jobs, while 61 percent say they never use this technology tool… In terms of government interest and adoption, a Bloomberg Philanthropies survey found 96 percent of mayors are interested in using AI, while the Government Accountability Office found many federal agencies already are implementing AI management and talent requirements.” Read more here
Artificial Intelligence, Digital Infrastructure
“Canada's federal government has considered making up to $15 billion available as an incentive to encourage major domestic pension funds to invest in AI data centres powered by green energy, the Globe and Mail reported on Thursday.” Read more here
“Amazon ticked up on Monday following Ohio Governor Mike DeWine's disclosure that by 2030 the firm intends to have $23 billion invested in the state. This amount includes extra $10 billion allocated to enhance data center infrastructure to meet rising artificial intelligence and cloud computing service demand.” Read more here
Artificial Intelligence, Safety & Security
“Lockheed Martin said on Monday it had formed a subsidiary that will help U.S. defense companies incorporate artificial intelligence into their operations. Companies across sectors have leaned more on AI over the past few years to help optimize their workflow. However, defense companies have remained cautious given the sensitive data required to train models in the sector.” Read more here
Cash-Strapped Consumer
“Gen X is a “sandwich” generation, facing the financial pressures of simultaneously supporting parents in retirement and kids as they come of age. Most Americans are grappling with the runaway inflation that followed the pandemic, but parents in this age group are uniquely focused on whether their kin will ever be able to make it without monetary aid.” Read more here
Cybersecurity
“According to a Wall Street Journal report, the U.S. Departments of Justice, Commerce, and Defense are looking into the issue, with at least one Commerce Department office having already subpoenaed the company. In recent years, TP-Link's market share has grown to approximately 65% of the U.S. market for SOHO routers (for homes and small business offices). This potentially artificial growth is powered by selling the devices for less than their manufacturing price, which the DOJ is also investigating.” Read more here
“A phishing campaign targeting automotive, chemical, and industrial manufacturing companies in Germany and the UK is abusing HubSpot to steal Microsoft Azure account credentials. The threat actors use HubSpot Free Form Builder links and DocuSign-mimicking PDFs to redirect victims to credential-harvesting pages. According to Palo Alto Networks' Unit 42 team of researchers, the campaign, which started in June 2024 and remained active until at least September 2024, has compromised approximately 20,000 accounts.” Read more here
Digital Payments
“Walmart’s majority-owned fintech, One, will take over the retailer’s dual co-brand and private label portfolio when it relaunches next year… Walmart is becoming a major payments player and introducing a new competitive threat to banks and other fintechs. And being able to market products to its massive customer base gives Walmart a key competitive advantage over more traditional financial institutions.” Read more here
Nuclear Energy & Uranium
“The resource-intensive nature of AI will create winners and losers. Those with the most resources will have the most advanced AI systems. It’s leading to clashes over increasingly scarce commodities, as well as access to chips. It’s motivating tech companies to seek more efficient means of developing AI. They’re throwing billions of dollars into alternative energy solutions such as nuclear fusion that have spent years if not decades sputtering along without heavy spending and technological breakthroughs.” Read more here
Space Economy
“The European Space Agency (ESA) is projecting that the global space economy grew to €121 billion ($127 billion) in the current year, 7% more than the 2023 level. The pace of growth is down slightly from the 11% seen between 2022 and 2023, according to a space economy report that ESA released Dec. 17.” Read more here
The Strategies Behind Our Thematic Models
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
Cash Strapped Consumer - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Cybersecurity - Companies that focus on protecting against the penetration of digital networks and the theft, ransom, corruption or destruction of data.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Digital Lifestyle - The companies behind our increasingly connected lives.
Digital Payments - This model focuses on companies benefitting from the accelerating structural adoption of digital payments and financial technology (FinTech).
EPS Diplomats - Profitable large capitalization companies proven to produce above-average EPS growth and provide investors with the benefit of multiple expansion.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The Strategies Behind Our Dividend Income Models
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.
Don’t be a stranger
Thanks for reading and if you have a suggestion for an article or book we should read, or a stream we should catch, email us at info@tematicaresearch.com. The same email works if you want to know more about our thematic and targeted exposure models listed above.