2024 SOY: Start Of the Year, Market Outlook
In this SOY, I will be discussing the market outlook to help retail investors plan for the year ahead. Please note that this is not financial advice, and I am not licensed to provide such advice. The insights shared here are my personal opinions based on statistics, technical analysis, macroeconomics, and seasonality statistics to manage maximum position sizing on a per-asset basis. You should always consult a licensed professional before making any and all financial decisions.
The main tickers I will be focusing on are SPY, QQQ, MSTR (which is included in QQQ), and VIX.
Macro Economics Overview
Politics will be the single most deterministic factor for performance this year and over the next four years.
Additionally, we must consider several legitimate concerns that could impact the market, including:
These factors must be discussed, evaluated, and modeled in order to properly assess the risks associated with individual portfolios. With this outline out of the way, let begin...
Environmental Disasters
The unpredictability of natural disasters, especially in a climate-altering world, can disrupt entire sectors, particularly agriculture, commodities, energy, and insurance markets. This is perhaps one of the most lucrative areas to make money, as 30+ years of systemic mispricing of risk has compounded due to the entire field of economics and finance treating climate science as an "externality." This logical error and mismanagement means that insurance companies are now scrambling to rework their pricing and risk models, pulling out of markets. There will undoubtedly be political pushback against companies as a direct result.
Companies such as the following are most likely to be effected by this: AIG, ALL, PGR, PRU, MET, TRV, CB, BRK.A, BRK.B, LMRK, CI, UNM, FNF, AFG, AFL, MFC. On a more broad market,
leveraged ETFs like XLE (Energy Select Sector SPDR Fund) and DRN (Direxion Daily Real Estate Bull 3X Shares) can provide indirect exposure to sectors impacted by environmental disasters, particularly in the energy and insurance markets and Bear Call Spreads or Bull Put Spreads on these tickers may be more capital efficient way to hedge against risk compared to standard puts/calls. If you're looking to play this issue, these tickers and specific sectors may be worth doing your own research on and taking whatever appropriate step are relevant to you and only after speaking to a licensed professional.
Pandemics
The impact of pandemics on global markets can be both immediate and far-reaching. Historically, health crises like COVID-19 have caused significant disruptions across supply chains, labor markets, and consumer behavior, while exacerbating volatility in sectors such as travel, hospitality, and healthcare. Unfortunately the incoming American administration seems to not have learned their lesson that defunding pandemic response teams or the WHO is objectively a bad idea for everyone and has catastrophic economic and market impacts. The economic fallout from pandemics can lead to governments introducing lockdowns, stimulus measures (and inflation), and mass quarantines, all of which directly affect market sentiment and asset performance. While the immediate market response is often sharp and negative, opportunities exist for those who are able to identify long-term shifts in consumer behavior and industry transformation. For those looking to profit from potential market dislocations, ETFs like XLF (Financial Select Sector SPDR Fund) and XLY (Consumer Discretionary Select Sector SPDR Fund) may provide exposure to sectors that experience heightened volatility during pandemics.
Commercial Mortgage-Backed Securities (CMBS)
The CMBS market has shown vulnerability in recent years, particularly in the wake of rising delinquency rates on office and retail spaces. This risk may also be compounded by underwater bonds such as the one's held by silicon valley bank and the recent increases in the 10 yr. Banks holding large portfolios of CMBS have been reluctant to acknowledge the true value of these assets, waiting for them to transition from Hold-to-Maturity (HTM) status to Other Than Temporarily Impaired (OTTI) status, at which point they will be forced to mark these assets to market, likely at a steep loss. This has the potential to destabilize the financials of banks heavily invested in commercial real estate, particularly those holding assets tied to struggling sectors such as office buildings and retail malls. Leveraged ETFs like DRV (Direxion Daily Real Estate Bear 3X Shares) and SRS (ProShares UltraShort Real Estate) can be used to gain short exposure to the real estate sector, which is vulnerable to the risk of widespread CMBS impairments.
https://www.tradingview.com/chart/DRV/HUaqzOPB-SOY-2024-DRV-Monthly-Seasonality-Stats/
Federal Reserve Interest Rates
The Federal Reserve's interest rate policies remain a primary influence on market behavior. A rising interest rate environment typically pressures asset prices, particularly in sectors reliant on cheap credit, such as technology, real estate, and consumer discretionary stocks. Conversely, lower interest rates can fuel asset inflation, driving up equity and bond prices. As interest rates increase, companies with high debt levels or those in capital-intensive industries are more likely to face pressure on their earnings and stock prices. Leveraged ETFs like XLK (Technology Select Sector SPDR Fund) and XHB (SPDR S&P Homebuilders ETF) are often impacted by rate hikes, which raise borrowing costs. On the other hand, TLT (iShares 20+ Year Treasury Bond ETF) tends to be more sensitive to lower interest rates.
Sanctions and Tariffs
Geopolitical tensions, particularly involving sanctions and tariffs, can have an immediate and profound impact on market dynamics. When countries impose tariffs or sanctions, it can disrupt global supply chains, raise production costs, and lead to higher inflation. Sectors such as industrials, energy, and manufacturing tend to be the most sensitive to trade policies, with tariffs acting as a hidden tax on businesses that depend on cross-border trade. To hedge against such risks, leveraged ETFs like XLI (Industrial Select Sector SPDR Fund) and XLE (Energy Select Sector SPDR Fund) may be relevant, depending on how tariffs are applied. Shorting specific ETFs through Put Spreads or Bear Call Spreads can also be used to mitigate exposure to sectors most affected by escalating trade barriers or sanctions.
Cyber Warfare
The rise of cyber warfare represents a significant risk to businesses and economies globally. As attacks on critical infrastructure, financial institutions, and large corporations increase, markets may react with volatility, especially in tech-heavy sectors or industries that are heavily reliant on digital systems. The increasing prevalence of ransomware, data breaches, and other malicious attacks can lead to costly disruptions, decreased consumer trust, and regulatory fines. Companies in sectors such as technology, defense, and financial services are at the highest risk of cyber-attacks. Leveraged ETFs like HACK (ETFMG Prime Cyber Security ETF) can provide targeted exposure to companies focused on cybersecurity. Additionally, options strategies such as Protective Puts and Straddle Spreads can be useful for managing risk in the event of a significant cyberattack impacting the market or a specific company.
https://www.tradingview.com/chart/HACK/ChrjutfM-SOY-2024-HACK-Monthly-Seasonality-Stats/
The Potential for Conflict with China
The growing tensions between the U.S. and China present a major risk to global markets, particularly in sectors reliant on international trade. If conflict were to escalate, either economically or militarily, there could be profound consequences on global supply chains, trade agreements, and investor confidence. A leveraged ETF like YINN (Direxion Daily China Bull 3X Shares) can provide exposure to Chinese equities, while YANG (Direxion Daily China Bear 3X Shares) provides inverse exposure to China’s stock market. When Russia decided to engage in a costly conflict, which to date has sacrificed more russian lives than the total death of both nukes on Japan, leveraged ETFs like RUSL (Direxion Daily Russia Bull 3X Shares) became a particularly effective tool for profiting from volatility associated with geopolitical instability, though the delist made it difficult to fully capture such profits.
https://www.tradingview.com/chart/YINN/0XgG0oD6-SOY-2024-YINN-China-Monthly-Seasonality-Stats/
MSTR’s Impact on SPY vs QQQ Performance Differentials
The inclusion of MSTR (MicroStrategy) in QQQ (Nasdaq-100 ETF) is a key factor that could cause significant performance differentials between SPY and QQQ. MSTR's heavy exposure to Bitcoin ties its performance directly to the volatile crypto market. A future crypto winter—a prolonged bear market in crypto—could cause MSTR to underperform, negatively affecting QQQ due to its weighting in the ETF. If this happens, QQQ may undergo rebalancing, potentially removing or reducing MSTR's weight to mitigate the impact. This would create a divergence between QQQ and SPY, as SPY is unaffected by crypto’s volatility and remains more stable with its broader sector exposure.
Thank for reading this year's SOY!
I hope you enjoyed this and I wish you all the best luck navigating the market.
Don't forget to hit the boost, follow and consider gifting a subscription if this helped you in anyway.
The main tickers I will be focusing on are SPY, QQQ, MSTR (which is included in QQQ), and VIX.
Macro Economics Overview
Politics will be the single most deterministic factor for performance this year and over the next four years.
Politics defines policy, policy defines macroeconomic conditions, and macros determine both the direction of a trend as well as the strength of that trend. Therefore, only inexperienced or uneducated traders ignore or object to the influence of politics when making financial decisions.
Additionally, we must consider several legitimate concerns that could impact the market, including:
- - Environmental disasters
- - Pandemics
- - Commercial Mortgage-Backed Securities (CMBS)
- - Federal Reserve interest rates
- - Sanctions and tariffs
- - Cyber warfare
- - The potential for conflict with China
- - SPY VS QQQ
These factors must be discussed, evaluated, and modeled in order to properly assess the risks associated with individual portfolios. With this outline out of the way, let begin...
Environmental Disasters
The unpredictability of natural disasters, especially in a climate-altering world, can disrupt entire sectors, particularly agriculture, commodities, energy, and insurance markets. This is perhaps one of the most lucrative areas to make money, as 30+ years of systemic mispricing of risk has compounded due to the entire field of economics and finance treating climate science as an "externality." This logical error and mismanagement means that insurance companies are now scrambling to rework their pricing and risk models, pulling out of markets. There will undoubtedly be political pushback against companies as a direct result.
Companies such as the following are most likely to be effected by this: AIG, ALL, PGR, PRU, MET, TRV, CB, BRK.A, BRK.B, LMRK, CI, UNM, FNF, AFG, AFL, MFC. On a more broad market,
leveraged ETFs like XLE (Energy Select Sector SPDR Fund) and DRN (Direxion Daily Real Estate Bull 3X Shares) can provide indirect exposure to sectors impacted by environmental disasters, particularly in the energy and insurance markets and Bear Call Spreads or Bull Put Spreads on these tickers may be more capital efficient way to hedge against risk compared to standard puts/calls. If you're looking to play this issue, these tickers and specific sectors may be worth doing your own research on and taking whatever appropriate step are relevant to you and only after speaking to a licensed professional.
Pandemics
The impact of pandemics on global markets can be both immediate and far-reaching. Historically, health crises like COVID-19 have caused significant disruptions across supply chains, labor markets, and consumer behavior, while exacerbating volatility in sectors such as travel, hospitality, and healthcare. Unfortunately the incoming American administration seems to not have learned their lesson that defunding pandemic response teams or the WHO is objectively a bad idea for everyone and has catastrophic economic and market impacts. The economic fallout from pandemics can lead to governments introducing lockdowns, stimulus measures (and inflation), and mass quarantines, all of which directly affect market sentiment and asset performance. While the immediate market response is often sharp and negative, opportunities exist for those who are able to identify long-term shifts in consumer behavior and industry transformation. For those looking to profit from potential market dislocations, ETFs like XLF (Financial Select Sector SPDR Fund) and XLY (Consumer Discretionary Select Sector SPDR Fund) may provide exposure to sectors that experience heightened volatility during pandemics.
Commercial Mortgage-Backed Securities (CMBS)
The CMBS market has shown vulnerability in recent years, particularly in the wake of rising delinquency rates on office and retail spaces. This risk may also be compounded by underwater bonds such as the one's held by silicon valley bank and the recent increases in the 10 yr. Banks holding large portfolios of CMBS have been reluctant to acknowledge the true value of these assets, waiting for them to transition from Hold-to-Maturity (HTM) status to Other Than Temporarily Impaired (OTTI) status, at which point they will be forced to mark these assets to market, likely at a steep loss. This has the potential to destabilize the financials of banks heavily invested in commercial real estate, particularly those holding assets tied to struggling sectors such as office buildings and retail malls. Leveraged ETFs like DRV (Direxion Daily Real Estate Bear 3X Shares) and SRS (ProShares UltraShort Real Estate) can be used to gain short exposure to the real estate sector, which is vulnerable to the risk of widespread CMBS impairments.
https://www.tradingview.com/chart/DRV/HUaqzOPB-SOY-2024-DRV-Monthly-Seasonality-Stats/
Federal Reserve Interest Rates
The Federal Reserve's interest rate policies remain a primary influence on market behavior. A rising interest rate environment typically pressures asset prices, particularly in sectors reliant on cheap credit, such as technology, real estate, and consumer discretionary stocks. Conversely, lower interest rates can fuel asset inflation, driving up equity and bond prices. As interest rates increase, companies with high debt levels or those in capital-intensive industries are more likely to face pressure on their earnings and stock prices. Leveraged ETFs like XLK (Technology Select Sector SPDR Fund) and XHB (SPDR S&P Homebuilders ETF) are often impacted by rate hikes, which raise borrowing costs. On the other hand, TLT (iShares 20+ Year Treasury Bond ETF) tends to be more sensitive to lower interest rates.
Sanctions and Tariffs
Geopolitical tensions, particularly involving sanctions and tariffs, can have an immediate and profound impact on market dynamics. When countries impose tariffs or sanctions, it can disrupt global supply chains, raise production costs, and lead to higher inflation. Sectors such as industrials, energy, and manufacturing tend to be the most sensitive to trade policies, with tariffs acting as a hidden tax on businesses that depend on cross-border trade. To hedge against such risks, leveraged ETFs like XLI (Industrial Select Sector SPDR Fund) and XLE (Energy Select Sector SPDR Fund) may be relevant, depending on how tariffs are applied. Shorting specific ETFs through Put Spreads or Bear Call Spreads can also be used to mitigate exposure to sectors most affected by escalating trade barriers or sanctions.
Cyber Warfare
The rise of cyber warfare represents a significant risk to businesses and economies globally. As attacks on critical infrastructure, financial institutions, and large corporations increase, markets may react with volatility, especially in tech-heavy sectors or industries that are heavily reliant on digital systems. The increasing prevalence of ransomware, data breaches, and other malicious attacks can lead to costly disruptions, decreased consumer trust, and regulatory fines. Companies in sectors such as technology, defense, and financial services are at the highest risk of cyber-attacks. Leveraged ETFs like HACK (ETFMG Prime Cyber Security ETF) can provide targeted exposure to companies focused on cybersecurity. Additionally, options strategies such as Protective Puts and Straddle Spreads can be useful for managing risk in the event of a significant cyberattack impacting the market or a specific company.
https://www.tradingview.com/chart/HACK/ChrjutfM-SOY-2024-HACK-Monthly-Seasonality-Stats/
The Potential for Conflict with China
The growing tensions between the U.S. and China present a major risk to global markets, particularly in sectors reliant on international trade. If conflict were to escalate, either economically or militarily, there could be profound consequences on global supply chains, trade agreements, and investor confidence. A leveraged ETF like YINN (Direxion Daily China Bull 3X Shares) can provide exposure to Chinese equities, while YANG (Direxion Daily China Bear 3X Shares) provides inverse exposure to China’s stock market. When Russia decided to engage in a costly conflict, which to date has sacrificed more russian lives than the total death of both nukes on Japan, leveraged ETFs like RUSL (Direxion Daily Russia Bull 3X Shares) became a particularly effective tool for profiting from volatility associated with geopolitical instability, though the delist made it difficult to fully capture such profits.
https://www.tradingview.com/chart/YINN/0XgG0oD6-SOY-2024-YINN-China-Monthly-Seasonality-Stats/
MSTR’s Impact on SPY vs QQQ Performance Differentials
The inclusion of MSTR (MicroStrategy) in QQQ (Nasdaq-100 ETF) is a key factor that could cause significant performance differentials between SPY and QQQ. MSTR's heavy exposure to Bitcoin ties its performance directly to the volatile crypto market. A future crypto winter—a prolonged bear market in crypto—could cause MSTR to underperform, negatively affecting QQQ due to its weighting in the ETF. If this happens, QQQ may undergo rebalancing, potentially removing or reducing MSTR's weight to mitigate the impact. This would create a divergence between QQQ and SPY, as SPY is unaffected by crypto’s volatility and remains more stable with its broader sector exposure.
Thank for reading this year's SOY!
I hope you enjoyed this and I wish you all the best luck navigating the market.
Don't forget to hit the boost, follow and consider gifting a subscription if this helped you in anyway.
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