WHAT STRATEGY FITS A SOFT LANDING IN A FOREST OF HIGH RATES

The Federal Reserve (FED) recently raised interest rates by 25 basis points, and the market has responded positively. This shift in interest rates has come as a surprise to many, especially after the negative sentiment in December when the market anticipated a potential recession. However, recent inflation reports and a higher than expected 517,000 jobs added in the latest jobs report have changed the consensus, leading to a potential soft landing for the economy. Despite this positive outlook, the economy remains highly volatile and it is difficult to predict the future with certainty.

The employment picture in the US is improving, with people going back to work after spending their savings on post-pandemic expenses. This is a positive sign, but it raises concerns about wage increases and inflation. Larry Summers, former US Treasury Secretary, argues that the US needs to maintain a 5-6% unemployment rate for five years to achieve the inflation rate target of 2-3%. The tight job market could lead to higher wages and inflation, resulting in an inflationary spiral. However, there is also a risk of disinflation if the stock market continues to go up, causing more money to flow into risky assets. This delicate situation requires careful consideration, as more companies may have more liquidity and raise more money, which could reignite inflation if the first inflationary cycle is not under control.

Federal Reserve Chairman Powell's recent speech was seen as a shift from a hawkish tone in December to a more dovish approach. The market is currently experiencing a buying frenzy, which is similar to the end of 2018 and beginning of 2019. Some factors contributing to this buying frenzy include tax loss harvesting and Powell's speech. Despite this positive sentiment, some smart investors are forecasting a robust second half of the year, while others are more cautious. Banks have been quietly calling around to book build for some initial public offerings (IPOs), with some companies expressing interest in going public. There is a risk in trying to crack the capital markets open, but the majority of the market is not made up of people, but of computers and algorithms. This leads to a reinforced buying and selling loop, with humans like our team at DHF Capital S.A., to strive to consistently front-run the computers.

Some high beta tech stocks have seen drastic increases in a short amount of time, leading to concerns about the market's health. This raises questions about the truth of the market's belief that inflation is on its way out. The yield curve, which is a prediction of the market on interest rates, is suggesting that within the next six months the rate may peak at 4.75% and then decrease to around 4% over the next two years. The market is predicting that the FED has done enough to combat inflation and that the cost of money will stabilize at 3.5% in the long-term. However, the accuracy of these predictions remains to be seen.

Ben Graham's book "The Intelligent Investor" suggests that the maximum price to earnings (P/E) ratio a stock should have is equal to two times the risk-free rate. The current S&P 500 trades at 22 times P/E, which may indicate that the market is still overvalued. In addition to the aforementioned points, it is important to note the potential impact of interest rate changes on various industries and segments of the economy. For example, the real estate sector, which heavily relies on low-interest rates to fuel growth, may be negatively impacted if the FED continues to keep rates high. In an environment of low cost of money, a period we are likely exiting from, using debt was the way to make real estate projects feasible and profitable. This because debt does not share in the value appreciation, it only its rate impacts the cost of the project and therefor in turn impacts the value. And debt usually being the majority of the investment, the increased capital cost ways exponentially more on the value to the investor. And this is not only the case in real-estate. The same effect is felt in capital intensive companies.

Additionally, the increase in interest rates could also curb consumer spending, leading to reduced demand and the potential for a slowdown in growth for consumer-oriented industries. This comes at a time when stock inventories are at an all-time high, with many companies holding more inventory than they would normally sell in the next two months. To clear this excess stock, companies may be forced to reduce prices, which would further squeeze their margins, as the inventory was produced when production costs were at their peak. This could ultimately have a negative impact on the stock price, which could become apparent when second quarter earnings are released.

Another factor to consider is the global economic landscape and how it may impact the US economy. The current global economic conditions, including the political tensions, war and trade disputes, add uncertainty to the future economic prospects of the US. The US economy has been the driver of global growth in recent years, and any slowdown in the US could have ripple effects throughout the world.

It is also crucial to consider the role of government policies and regulations in shaping the economy. The recent policy initiatives aimed at providing fiscal stimulus, such as infrastructure spending, could have a positive impact on growth. On the other hand, regulations and taxes aimed at curbing growth in certain industries could have the opposite effect. The FED's ability to navigate these challenges while maintaining stability in the economy is a key factor to watch in the coming months and years.

In conclusion, while the recent shift in interest rates and positive economic indicators provide a reason for optimism, the economy remains highly uncertain and subject to many variables. At this moment we at DHF Capital S.A. feel that the rally we are currently experiencing could go on for another two months. Because a potential slowdown in growth for consumer-oriented industries, at a time when companies are holding all-time high stock inventories could negatively impact their margins that in turn will impact their stock prices. In addition after these two months the ripple effect of higher interest rates will be felt clearly in all industries while in the meantime investors bank the feeling that big cap stocks have reduced their cost enough to produce free cashflow.

However from the employment picture to the global economic landscape, to the impact of government policies and regulations, there are many factors that will impact the future of the economy. As such, investors and analysts must approach the market with caution and remain vigilant in their analysis and decision-making. It is important to be mindful of market conditions, economic indicators, and shifts in global events in order to make informed decisions that protect and grow their investments. Therefor we believe that the real winners will be the ones that keep a close tap on markets.

We believe therefor that the best strategy in this market is a multiple properietary algorithmic trading strategy. Preformed by a team that is able to identify opportunities in a variety of markets and under a variety of conditions. At DHF Capital S.A. we have created just that. A committed team of highly professional traders that seeks long and short opportunities in currencies, commodities and stocks.