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Stock and bond markets will be closed on Monday, January 20, 2025, in observance of Martin Luther King Jr. Day.
Included in this report:
- Weekly summary.
- Ensemble performance
- Update on market positioning.
- Stock market forecast
- Capital markets update.
This report makes a brief reference to Modern Monetary Theory (MMT) and to the possibility that it will become the primary economic policy framework in the future.
1. Weekly summary (January 13–January 17, 2025)
- Stocks rallied after a better-than-expected core CPI reading for December 2025. Large-cap stocks (SPY) surged 2.9%.
- Gold (GLD) gained 0.4% while the US dollar index (UUP) ended the week slightly down, by 0.1%.
- Long-duration bonds rebounded. The TLT ETF ended the week up 2%.
- Commodities were up due to gains in energy, grains, and gold. The DBC ETF gained 1.4% and remains overbought.
- Since January 3, 2022, bonds (TLT) have been down 35.1%, while gold and large caps (SPY) have gained 45.8% and 31.5%, respectively.
- During the week, the equally weighted Magnificent Seven stocks index gained 2%. Tesla (TSLA) surged 8%, but Apple (AAPL) fell 2.9%.
- All market sectors gained this week. Energy (XLE) surged 6.3%, while health care was up the least, by 0.4%.
AI comment: “This indicates strong overall market performance, with all sectors experiencing gains despite some individual stock fluctuations.”
Sector ETF relative performance
Energy (XLE) is up the most year-to-date, with a gain of 9.7%. Last week only health care (XLV) in addition to energy (XLE) was up for the year, but after the rally of this week, all sectors show gains except consumer staples (XLP), which is down 1.7%. Therefore, sector breadth significantly improved this week.
MMT’s Comeback?
After a long absence from public debate while inflation was rising in 2021 and 2022, Modern Monetary Theory (MMT) economists have made a strong comeback. Their main argument is that they are misunderstood and no one understands the merits of their theory. The theory essentially asserts that nations issuing their own currency can settle all debts through the creation of fiat currency. When confronted by opponents who argue that currency printing is inflationary, the MMT proponents claim that if inflation becomes a problem, governments can increase taxes or cut spending. As far as the Fed and whether a central bank is useful or not, MMT proponents argue for less independence and a close cooperation with Treasury. In essence, then, they support making the Fed a branch of the government, although opinions may vary on that issue.
The topic of MMT can become intricate. However, we believe that MMT is poised to gain momentum. Are we seeing the dawn of a new era? The new administration has argued against deficit limits and low rates, and there has been talk about abolishing the Fed. Undoubtedly, as developments in artificial intelligence and robotics accelerate, MMT may be seen as the solution, not the problem. However, that may lead to a restructuring of the global financial system in the context of spheres of influence. Is this related to a great reset, and how will it affect financial markets? We will attempt to break it down in future reports. In the meantime, stay alert and watch for developments that signal a major regime change on a global scale.
AI comment: “This suggests that as MMT gains traction in addressing challenges posed by robotics advancements, it could fundamentally alter the dynamics of international finance. Such a shift may reshape market behaviors and investment strategies, warranting close observation in the coming months.”
2. Ensemble performance
We use two long-only cross-sectional momentum strategies to generate signals for capital markets and factor ETFs. See Section 3 below for open positions and signal updates.
Year-to-date, the weekly strategies (WeeklyReport) are down 0.7% (equal allocation, no leverage) versus a gain of 2% for the SPY ETF. Gold (GLD) is up 2.9% year-to-date. The US dollar index (UUP) is up 1%, and long-duration bonds (TLT) are down 0.2%. Since 2024, the ensemble is up 26.5% versus 27.4% for the SPY ETF.
The ensemble’s (WeeklyReport) beta since 2017 is 0.28, and correlation with the S&P 500 index is 0.55. The Sharpe ratio is 0.88. See Section 3 for details on market positioning.
3. Update on market positioning
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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: The Weekly Market Reports are provided for informational purposes only and do not constitute investment advice or actionable content. We do not warrant the accuracy, completeness, fitness, or timeliness for any particular purposes of the Weekly Market Reports. Under no circumstances should the Weekly Market Reports be treated as financial advice. The author of this website is not a registered financial adviser. Before subscribing, please read our Disclaimer and Terms and Conditions.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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