The Kickoff to a New Capital Cycle

WEEKLY UPDATE

The Fed Takes Bold Action

Last week, the U.S. Federal Reserve made a significant move by cutting interest rates by 0.5%—a larger reduction than most had anticipated. This decision aims to support employment, as the Fed believes inflation is now under better control. The decline in oil prices, and therefore the “price at the pump,” is expected to contribute to further easing of inflation. The Fed is projecting an additional 0.5% rate cut by the end of the year, likely spread across the two remaining meetings in 2024 with a 0.25% cut at each.

This rate cut sparked a flurry of activity in financial markets as investors scrambled to assess its implications. Initially, stock markets reacted with slight declines on the day of the announcement. However, the following day, sentiment turned positive as investors interpreted the move as increasing the chances of a "soft landing" for the economy, while also creating a more favorable borrowing environment for businesses. The pessimistic narrative—that the rate cut could signal a sharp economic downturn—was largely set aside, at least for now.

?Yet Rates are Rising?

Despite the Fed’s rate cut, longer-term bond yields have risen. This might seem counterintuitive, but it happens because aggressive monetary easing from the Fed typically increases the likelihood of higher inflation and stronger economic growth over the long term. Meanwhile, central banks are continuing to unwind their massive bond holdings, meaning more government bonds are available for private investors to purchase. In the U.S., the 10-year Treasury yield has climbed to 3.72%, up from 3.60% earlier in the week.

Germany’s Economic Outlook Hits a New Low

The German ZEW index, which measures economic sentiment, dropped sharply in September, falling to 3.6 from 19.2 in August. This significant decline indicates a lack of optimism among analysts regarding the outlook for the German economy in the coming months, particularly in the industrial sector, which has been showing signs of weakness.

Bank of Japan Holds Rates Steady

As expected, the Bank of Japan (BOJ) kept interest rates unchanged at 0.25%. BOJ Governor Ueda’s cautious comments suggest that further rate hikes are off the table for now, with inflation risks appearing to ease and wage growth closely monitored. The BOJ is waiting for more data on service prices and wage trends before making any additional decisions. The yen’s role as a safe-haven currency, especially during crises, combined with its use in carry trades, means it could strengthen further if the global economy takes a sharp downturn, as we saw earlier this year.

NDI-FutureTech

NDI-FutureTech has risen approximately 4% over the week, bringing total gains to about 19,82% year to date.

The recent 0.5% rate cut in the U.S. marks a turning point, signaling a new phase in monetary policy. This also brings us closer to a period of growth and increased liquidity. There’s ongoing debate about whether the market will experience a sharp drop before it rallies, or if we’re already on an upward trajectory. Others believe we may see gains before a significant correction.

For some perspective, take a look at this Peter Lynch clip, where he discusses how constant worries kept many from investing in growth stocks during the '50s, '60s, '70s, '80s, and '90s. Lynch’s message is clear: think long-term and invest in growth and technology stocks.

Now seems like an opportune moment, especially since growth and tech stocks have been in a three-year slump, and we may be on the verge of a new capital cycle.

Some of you may wonder, why we say that tech stocks have been in a three-year slump, while the indexes and Nasdaq sit at all time highs. But the truth of the matter is, that Big Tech has performed excellently, while small and midcap has performed poorly. Have a look at this 3-year graph, showcasing how Nasdaq performs better than equal weighted Nasdaq, and much better than EMCLOUD, which consists of 70 small and midcap stocks.

BigTech is no longer true tech

One reason for the stark difference in performance between Big Tech and smaller tech companies is that Big Tech is no longer what we would classify as “technology.” In NDI-FutureTech, we define a tech company as one with a new, value-creating process.

Let’s illustrate this with two examples:

Company A: Hello Fresh

Hello Fresh sells meal kits—pre-portioned food packages delivered to your home.

Company B: Microsoft

Microsoft sells the Windows operating system for PCs.

Many would instinctively think of Microsoft’s Windows as technology, but not meal kits. However, we believe Hello Fresh is a tech company because it has introduced a new, value-creating process within the supply chain. On the other hand, Looking at Microsoft’s Windows, it is a nearly 40-year-old product, a now mature offering and no longer fits our definition of technology.

NVIDIA and Tesla are the only true tech companies left in Big Tech, while the rest are mature businesses. This is reflected in their profitability. Investors have favored these profitable giants in recent years, while younger, less profitable tech firms have fallen out of favor. Our key point here is that if you want to invest in technology, it’s no longer enough to just buy Big Tech (except for Tesla and NVIDIA). Now, you need to look at smaller and mid-cap tech companies.

Since 2022, we’ve maintained that falling interest rates are essential for small and mid-cap tech stocks to see multiple expansions again, i.e., rising valuations. What’s still holding growth and tech stocks back is the fear of a hard landing for the economy.

Should You Wait Until the Landing is Clear?

No. The stock market will continuously price in the landing along the way. By the time it’s confirmed whether we’re heading for a hard or soft landing, the market will have already reacted. Following Peter Lynch’s advice—stay invested for the next 10-20 years—is the simplest strategy. Our view is that when we look back on 2023-24 in ten years, this period will likely be seen as a bottom for small and mid-cap tech, regardless of whether a hard or soft landing occurs.

THE COMING WEEK

Will Europe Turn the Corner?

We kick off the week with the Eurozone PMI figures on Monday. Expectations are fairly low, especially after the previously mentioned ZEW index, which showed analyst sentiment on Germany hitting rock bottom last week. While lower oil prices and slower wage growth could pave the way for some optimism, it won’t help much if businesses continue to see weak demand.

Will the US Unemployment Grow?

Thursday brings one of the most-watched economic indicators: the weekly jobless claims in the U.S. This figure, which tracks how many people are filing for unemployment, has gained more attention recently, as focus has shifted from inflation to the health of the labor market.

Inflation Watch to End the Week

On Friday, we’ll get a glimpse of inflation trends through the U.S. PCE data, the Fed’s preferred inflation gauge. It would be surprising if this deviates much from the broader Consumer Price Index, which has been steadily declining toward the Fed’s 2% target. Still, an upside surprise could shake up the markets.

Upcoming Live Q&A Session

This Sunday at 8:00 PM ?? Mads Christiansen, Chief Investment Officer at NewDeal Invest and Jesper B?k, part of the NDI-FutureTech Portfolio team, will host a live Q&A session on YouTube. This is your chance to ask about our portfolio strategy, stock picks or our upcoming quarterly rebalance. Don't forget to tune in!