Staying Ahead Of The Market With Alternative Data In 2024 – US Interest Rates & The Magnificent 7
Eagle Alpha
Est. in 2012, Eagle Alpha is the leading aggregator and platform for alternative data. Contact: [email protected]
Investment strategy performance dispersion was particularly pronounced last year – the developments in the US economy through the year challenged consensus thinking and returns, for equity investors, were realized in a particularly narrow group of companies. Furthermore, private markets had a significant repricing of capital impacting event strategies as M&A went to cyclical lows.
We had to contend with market commentary for most of the year that we were heading into a recession only to finish 2023 with celebrations that the Fed had manufactured a ‘soft landing’. We observed a level of stock market concentration and index performance contribution that is unrivaled in stock market history.
Looking ahead, where will 10-year yields be in H2 2024? Will other Magnificent 7 names or the Technology sector see a de-rating like Tesla year to date? Will non-US equity perform in 2024?? Will we see an increased dispersion of returns within US equities? ?Will M&A increase? These are key questions for a variety of strategy types. We believe alternative data has a key role in arriving at answers to these questions in 2024.
Interest Rates – Time To Focus On Housing?
We believe the market, including central banks, is not fully harnessing the potential of alternative data in macro forecasting. In a prior newsletter, we referenced how a group of PhD students from Fordham in an Eagle Alpha Hackathon were able to outperform the NY Fed GDP Nowcasting model using weekly transaction data, daily sentiment from news articles, weekly app usage data, daily satellite data, monthly real estate, and daily social media insights.
A key call to get right for many investment strategies last year was the trajectory of the US interest rate cycle. In 2023, there were real-time macro nowcasts/forecasts (like Truflation) that told you the inflation-fighting mandate of the Federal Reserve was set to abate. These real-time inflation measures for US CPI are now showing new lows in terms of YOY % change (as is the United Kingdom). ?
How will the ‘transitory inflation’ versus ‘higher for longer’ interest rate debate play out in 2024? One area that looks particularly interesting for deeper data analysis is housing inflation. Housing represents approximately one-third of the US CPI calculation and has been a major contributor to higher inflation. It is often described as ‘sticky’ as there are lagging elements to the calculation as it includes both new and existing rental leases – the latter repricing infrequently. Also, monthly surveys capture ‘owner equivalent rent’ and what homeowners would expect their homes to rent for.
What is standing out is the collapse in the pricing of new leases. This is a new data series released by the BLS that may lead overall housing inflation lower. Searching our platform today of 1,900 datasets there are data sources to explore in this area reviewing a search for “residential rent”. Zillow data is well known but there are other sources with real-time rental prices for most MSAs from thousands of property managers. Why wait for the Fed to confirm if inflation is ‘transitory’ when components like housing and others can be measured in real-time?
The Magnificent 7 & Large Cap Tech – it's time to enhance KPI modeling.
Another key call in 2024 for equity managers is their level of ownership in technology specifically the “Magnificent 7” of Tesla, Apple, Google, Meta, Nvidia, Amazon, and Microsoft. How much further can these mega-cap names contribute to the performance of the S&P500?
In a 2021 Eagle Alpha virtual conference, Blackrock SAE spoke about the information ratio gained from alternative data sources when owning stocks that are in a growth or momentum phase to ensure earnings trends and revisions remain positive. This makes sense intuitively. In a value phase, one could argue traditional accounting and financial data are sufficient to capture this factor.
We dug into this in more detail at our recent New York conference with various data specialists discussing trends in their data as it related to the “Magnificent 7” names. Some callouts included:?
Many of the trends in these data types presented on the day had interesting conclusions both positive and negative. We look forward to showcasing this type of analysis further at future conferences.
The session validated that deeper KPI modeling for these names, and others, should remain in focus in 2024. Many of the top multi-strategy and ‘quantamental’ funds are advanced in their approaches here and considering how alternative data aligns with company models.?
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Which KPIs matter for these stocks? This is not easy to back-test. To consider two companies, according to data from Daloopa, since its IPO in 2010, Tesla has provided approximately 300 KPIs separate from accounting data in its quarterly regulatory filings. Approximately 30 of these have 5 or more years of history to consider. For Nvidia, there are 47 KPIs reported in filings but there are a very limited number that have more than 3 years of history never mind 5 years.
In 2024, we expect to see an increased focus on leading data vendors aligning their data with company KPIs. Many vendors with insights and research groups are making important strides to provide this. However, we are still at low levels of data coverage outside of North American B2C insights. This represents a significant opportunity for data and solution providers. Where there are blind spots, corporate data also has an important role to play in helping fill these blind spots. We look forward to updating the market more on developments here throughout the year.
Best wishes for 2024 and happy data hunting to our readers.
Regards,
Niall Hurley, CEO
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