Expect the Unexpected
The new year kicked off with several unforeseen events spanning global logistics, sports, and financial markets which have captured public attention. Notably, the Detroit Lions' unexpected journey to the NFC Championship game in the NFL, completing an impressive regular-season performance, took many by surprise. This unexpected success stirred significant enthusiasm, particularly from people surrounding this Midwestern firm's roots. However, beyond the realm of sports and to the point of business, the US economy continued its robust expansion, with another strong fourth quarter performance in 2023 driven by resilient consumer activity. Concurrently, the broader US stock market surged to reclaim its all-time high, relegating memories of the 2023 tech stock downturn to the background of investors' minds.
January also witnessed a significant shift in financial regulatory dynamics. After a protracted legal battle that commenced in 2018, the Securities and Exchange Commission (SEC) finally greenlit the first-ever exchange-traded product backed by Bitcoin for public exchanges. This decision came after a District of Columbia appellate court held that the SEC failed to provide adequate reasons to reject prior filings for Bitcoin-backed products. However, while the approval marked a regulatory milestone, SEC Chairman Gary Gensler was quick to caution against interpreting it as an endorsement of Bitcoin's speculative nature or its potential for facilitating illicit activities. Moreover, Chairman Gensler publicly stated that this decision does not set a precedent for approving similar products for non-Bitcoin digital currencies. Nonetheless, the SEC anticipates that allowing Bitcoin-linked products in regulated financial markets will enhance accountability and level the playing field for market participants. The spot price of Bitcoin experienced a mild decline following the wake of this news but has since recaptured those losses.
Meanwhile, a global event unfolded, disrupting shipping routes in and out of the Red Sea. The Houthis, a political and military group, initiated attacks on commercial vessels traversing the Bab al-Mandab Strait. Given that six to eight percent of global trade and about thirty percent of global container traffic passes through this strategic waterway, the attacks adversely impacted shipping rates, leading vessels to reroute around South Africa. This development poses significant economic and humanitarian risks, highlighting the urgent need for resolution. Even though higher shipping rates pose inflation problems, it may not be as great of a threat as it might originally seem, as many developed economies have substituted durable goods demand for services.
Despite all of these unforeseen events, inflation data for December aligned closely with consensus forecasts. This prompted swift reactions in interest rate futures markets. Initially, there was a surge in expectations that the Federal Reserve (Fed) would commence a rate-cutting cycle in March. However, as the month progressed, these expectations dwindled amidst indications that non-US central banks would leave benchmark interest rates unchanged. For a brief moment, portions of the yield curve began to flatten as short-term rates, particularly the two-year rate, lessened to approach thirty and ten-year rates. However, short-term rates regained altitude after Chairman Powell, speaking on behalf of the Fed's open market committee, tempered expectations by signaling that short-term rates wouldn't decline until the committee gained greater confidence that it was closer to the two-percent inflation target.
In reflecting on these events, football fans and market investors appear to have more in common than they might otherwise realize. Both face uncertainty and must navigate the unknown, relying on strategic planning and creative action at the beginning of a new season or when making a new investment. Without uncertainty, everything would look like a risk-free rate, and the world might appear less interesting, providing no incentive for competition or intelligible resource allocations that would greatly set societies back. However, unlike a sports betting house, most investment markets offer opportunities for prosperity within the framework of free-market economics, underscoring the resilience and adaptability of a strong financial plan in place. A great coach would never show up without a game plan. Likewise, investors wouldn't want to risk everything without considering the details and constructing a financial plan.
