Santa Rally Ends with Stock Declines and Rising Interest Rates

WEEKLY UPDATE

Powell Damps the Holiday Cheer

Markets have hit record highs in recent weeks, but Wednesday's Federal Reserve meeting put a clear damper on the festivities. As we wrote last week (INSERT LINK), the market expected a 0.25% rate cut, which was indeed delivered. However, as we also highlighted, there was a risk that future rate cuts might fall short of market expectations.

This turned out to be spot on. The Fed’s dot plot forecast for 2025 and 2026 showed fewer rate cuts than investors had hoped for, triggering notable declines in stock prices, rising interest rates, and a stronger dollar. Technology stocks were hit hardest by this risk-averse sentiment, with the Nasdaq slipping nearly 3% last week.

Bond Market Turbulence

The U.S. bond market experienced a volatile week, marked by significant interest rate increases. On Wednesday, the 10-year U.S. Treasury yield climbed from 4.40% to 4.50%, fueled by the aforementioned Federal Reserve meeting. The forecast of only two rate cuts in 2025, down from the four indicated in September, disappointed investors and put additional pressure on bonds.

The disappointment deepened on Thursday with higher-than-expected growth and inflation data from the U.S., coupled with comments from former (and potentially future) President Trump about abolishing the debt ceiling. These developments pushed yields further, with the 10-year Treasury reaching 4.58%. Trump's remarks raised concerns that a future administration might pursue expansionary fiscal policies, heightening fears of persistently high inflation—already a major worry in the market.

Since September, the 10-year yield has risen from 3.60% to 4.56%, once again becoming a key focus for investors. Higher rates are driving up borrowing costs for the U.S. government, dampening loan growth and clouding economic growth prospects. Ironically, Trump’s statement, meant to highlight fiscal freedom, is now a contributing factor to rising interest rates.

Novo Nordisk Stumbles

No investment newsletter out of Denmark this week would be complete without mentioning Novo Nordisk’s dramatic share price drop this week, whether or not its tech. The Danish pharmaceutical giant presented Phase 3 trial results for its upcoming weight-loss drug, Cagrisema. The drug demonstrated a 22.7% weight reduction, below the anticipated 25% target, and the stock tumbled upwards of 27%.

Some analysts downplayed the results, arguing that a 22.7% reduction is only slightly below 25%. However, this misses the point entirely.

From Bloomberg:

“Novo Nordisk’s results for its CagriSema drug (20.4–22.7% weight loss vs. targeted 25%) look on par with Eli Lilly’s marketed ZepBound. Lilly also has retatrutide to follow, which may offer even greater potency. With the patent expiration of Wegovy in the early 2030s and potential IRA headwinds, the underwhelming result will likely pressure consensus, which sees the asset driving almost 20% of Novo’s sales in 2030. There’s now added focus on Novo’s amycretin, though it’s only in Phase 1 trials currently.”

— John Murphy, BI Pharma Analyst

The issue is that Novo is a growth stock. Its valuation hinges on expectations of strong future earnings. Once Wegovy’s patent expires and generics enter the market, Novo needs a new premium product to sustain growth. Marginally better alternatives won’t justify premium pricing, especially in a market flooded with cheaper generics. Furthermore, Novo Nordisk faces regulatory risks, giving disrupters like Hims & Hers (and which we are overweight in NDI-FutureTech) more than just a fighting chance. Should U.S. policymakers begin favoring platforms that provide more affordable GLP-1 products for the masses.

NDI-FUTURETECH

NDI-FutureTech is up 42,7% this year.

For the second consecutive week, NDI-FutureTech posted a negative return. As mentioned last week, this reflects a healthy correction following strong gains in the fall.

Market volatility is beneficial for NDI-FutureTech investors, as our mission is to maximize long-term returns by investing in tech stocks. Our strategy involves diversified investments across geographies, business models, and technologies. This allows us to capitalize on short-term market imbalances, creating opportunities to enhance portfolio value during periods of turmoil.

Turmoil in Brazil and Declines in Mercado Libre and NuBank Highlight the Importance of Sound Portfolio Management

Companies with exposure to Brazil have suffered losses due to political unrest and weakness in the Brazilian real. As a result, the revenues Brazilian companies generate in reais are worth less when converted to U.S. dollars.

This volatility is far from surprising. Latin America has long been a region prone to political turbulence and currency devaluations, and Brazil is well-known for prioritizing local powerbrokers’ interests over those of foreign investors.

Tech investors have been tempted to take significant positions in Mercado Libre and NuBank because these are fantastic companies with high growth potential and attractive valuations, offering a solid risk-reward profile. However, you’ll rarely find professional managers with large stakes in both companies simultaneously. The reason is simple: it introduces excessive risk to the portfolio.

For instance, holding 3% in each company would mean at least 6% of the portfolio is heavily exposed to Brazil, a level of concentration that would be irresponsible unless managing an emerging markets fund where such risks are expected. Beyond the issue of elevated portfolio volatility, the primary problem lies in the inability to capitalize on price declines. If 6% of the portfolio is already allocated to Brazil, a manager is unlikely to commit more capital to Brazilian companies unless they have specific insights into the local political landscape. Due to our broadly diversified strategy, both are however, to be found in NDI-FutureTech ,though at a significantly lower concentration.

Ironically, the risk of investing in NuBank is higher for short-term investors due to current instability but not for long-term investors, as such volatility in Latin America is entirely predictable. Proper portfolio construction ensures the ability to act decisively during market dislocations, enabling investors to be aggressive when opportunities arise.

To be clear, this is not a recommendation to buy NuBank. It should be seen as a high-risk, attractive investment, but its high-risk nature means it is only appropriate in a highly diversified portfolio or for younger investors, whose primary income lies in the future.

In a traditional global portfolio with 30 stocks, Brazil should likely represent no more than 2–3%. Mercado Libre is perhaps the better choice, as it provides greater diversification for the portfolio, functioning as both a bank and an e-commerce company.

LOOKING AHEAD

A Quiet Week Ahead

With the holiday season in full swing, there are few major economic indicators or earnings reports to follow. Thin market liquidity during this period can lead to larger price swings, but long-term investors should not be swayed by short-term volatility.

We’ll check back after Christmas to see how markets have fared. Look out for our next newsletter on December 30.

Merry Christmas!