Battening Down for January’s Perfect Storm

2024’s bull market — typified by the S&P 500's 26% YTD return — has been nothing less than impressive and stems from investor optimism about macroeconomic conditions, corporate earnings growth, and the Cambrian explosion of generative AI. Still, there exists an underlying tension as investors vacillate between their desire to capitalize on the ongoing rally and valid concerns about the sustainability of current valuations. Given this fragile backdrop, it is imperative that investors begin preparing and positioning for a convergence of potential market-moving events in January.

Here are some of the major catalysts comprising this “perfect storm” that will make landfall in the new year:

• Change in US administration
• 4Q 2024 Earnings Season
• December economic data - most notably CPI on Jan 15th
• CES 2025
• January’s FOMC meeting

Just as meteorologists use multiple data sources and models to track an approaching storm, investment professionals need sophisticated tools and multiple analytical lenses to navigate periods of heightened uncertainty and potential volatility. This multi-faceted approach becomes particularly crucial when markets face simultaneous catalysts that could trigger cascading effects across sectors, factors, and asset classes. In the following, we will discuss how investment professionals can use Omega Point to prepare for this unique market environment.

‍Understanding Your Portfolio's Current Positioning

Before preparing for any specific event, it's essential to first establish a baseline understanding of your portfolio's risk and exposure profile. Omega Point’s integration with the three major risk model providers (Axioma, Barra, and Wolfe Research), allows investors to quickly assess the drivers of portfolio risk and return.

In the below example, a PM focused on US tech is not only able to see that the bulk of their Style risk is coming from Volatility, but that contribution to risk from Volatility is being flagged as much higher than the historical average.

This means that if a market downturn were to occur, this portfolio might experience a significant drawdown. Armed with this knowledge, the PM might want to take measures to reduce or hedge their Volatility exposure.

Let’s now continue our look at the January catalysts to see what other views can be used to tackle each.

‍Change in Command: Preparing for The New Administration

‍The incoming Trump administration brings with it a significant amount of uncertainty. Now that the post-election market rally has calmed, investors are waiting to find out which campaign promises will be acted upon and to what extent. Given the imminent Republican trifecta, it is reasonable to expect an early burst of legislation, but less obvious whether immigration, tariffs, or tax cuts will be the initial focus.

Using Omega Point’s index workflows, investors are able to examine their portfolio relative to baskets created by the world’s top prime brokers, including baskets composed to reflect the biggest winners and losers from Republican policy. This analysis can help identify areas that require adjustment before the transition occurs.

Further, by leveraging our Thematic Package, you can visualize your portfolio’s beta to aggregate themes. In this example, this portfolio has rapidly developed a high negative beta to US Republican Policy since the election, a position that the manager might want to interrogate and mitigate ahead of the inauguration.

‍4Q 2024 Earnings

‍4Q earnings season kicks off almost immediately after inauguration, adding another layer of complexity to the fundamental process. Omega Point allows investors to analyze their portfolio's earnings sensitivity across multiple dimensions, including factor exposures, sector concentrations, and company-specific risks. This analysis helps identify where earnings surprises might have the most significant impact on portfolio performance.

Further, Omega Point’s integration with OdinUltra’s leading AI-generated fundamental forecasts provides investors with a differentiated tool to assess companies ahead of earnings. OdinUltra uses over 1,400 factual and non-panel sources to generate detailed and highly accurate forecasts for over a thousand publicly traded companies, sectors, industries, and economies. In this screenshot, we can see that OdinUltra is predicting a revenue beat relative to consensus for Microsoft.

Omega Point also provides several ways to capture crowding and short interest, including S3’s Short Interest data and factors native to Wolfe Research’s models. For example, when viewing ASML through the lens of Wolfe’s QES US model, we can see that exposure to Hedge Fund Crowding has decreased while Quant Sentiment has been on the rise.

These types of insights are invaluable when trying to understand how the market is positioned around a name ahead of the earnings print.

‍Monetary Policy and Inflation Considerations

‍Among other economic indicators, December's CPI announcement on January 15th has the potential to move the market, potentially amplified by inflationary fears around certain Republican policies. The FOMC meeting at month-end is yet another lever that can affect stock prices and market sentiment.

Omega Point's integration with Quant Insight's macro model enables investors to examine their portfolio's sensitivity to vitally important macro factors such as Inflation (pictured below).

The Thematic Package is another way to extract insights on the portfolio’s positioning to themes such as Inflation and Rate Sensitivity. This sample portfolio has an increased beta to Inflation while exhibiting a strong inverse relationship with stocks that are sensitive to changes in interest rates.

CES 2025

‍On January 6th, Nvidia CEO Jensen Huang will deliver the opening keynote at the Consumer Electronics Show, followed by a Q&A session on January 7. Given Nvidia’s key role in the AI revolution, this event has the potential to influence investor sentiment in the weighty tech/AI sectors as well as the broader market.

Investors who are eager to understand their own portfolio’s relationship with the AI theme can leverage the Thematic Package to see their portfolio’s sensitivities to broker baskets that tell different parts of the story. Below, we see a portfolio which has seen a remarkably sharp increase in beta to the AI theme over just the last month. This is yet another example where the PM is now better equipped to drill down to the names driving this dynamic, and see if they are comfortable with this positioning heading into the new year.

Once the factors and themes that are most important (or worrisome) have been identified, investors are able to use Omega Point’s rebalancing tools to make portfolio adjustments and optimizations ahead of these events. This might involve adjusting factor exposures, rebalancing sector weights, or implementing specific hedging strategies to protect against identified risks. ‍

Taking Action in December

‍The number of significant events happening next month presents both uncertainty and opportunity. We believe that now is the time to start preparing, and that Omega Point offers the insights and tools necessary to successfully navigate what should be a very dynamic start to the new year.

Please reach out if you would like to see how your portfolio is positioned relative to each of these upcoming catalysts.