Coiled Spring Capital Macro Report - Holiday Edition - 12/22/24

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Table of Contents

• Introduction

• Index Analysis

• Internals

• Macro Updates

• Crypto

• Conclusion

Happy Holidays from All of Us

We want to wish all of our readers a joyful and fulfilling holiday season. May your time with loved ones bring warmth and happiness, and may 2025 be a year of success and realized aspirations. We deeply appreciate your continued trust in our analysis and insights.

Looking ahead, we are excited to announce several initiatives in 2025 to enhance your experience:

• Improved research formats for clarity and usability.

• Weekly video updates for more dynamic content.

• Affiliate partnerships and marketing to expand our reach and deliver more value.

• Managed money services to provide even greater support for your investment goals.

We can’t wait to roll these out—stay tuned for more updates!

With family in town for the holidays, we’ll pause mid-week updates until January. Thank you for your understanding as we take this time to recharge and prepare for the year ahead.

Introduction

Last week felt like a rollercoaster, with the FOMC stepping in as the market's very own version of the "Grinch." The hawkish tone from Wednesday’s meeting rattled investors, as systematic traders scrambled to adjust expectations for rate cuts in 2025.

If you’ve been following our research, you know we always emphasize that macro matters most when assessing the stock market's trajectory. As Marty Zweig famously said in 1970, “Don’t fight the Fed.” That mantra exists for a reason: the Federal Reserve holds unparalleled influence over liquidity, and when liquidity tightens (via higher rates), risk assets feel the impact—especially when valuations are stretched.

Rapid shifts in interest rate expectations lead to equally rapid adjustments in asset valuations. This "repricing of risk" gets quickly reflected in liquid markets, creating a step-down in asset values. Last week's negative weekly performance across major indexes—and even Bitcoin—is a testament to this dynamic at work.

As we move forward, understanding the macro environment remains paramount. Thank you for your continued readership, and we look forward to navigating the markets together in 2025!

We had been flagging warning signs all month—deteriorating market breadth and excessive bullish sentiment were flashing caution. However, we expected these issues to materialize in the new year, not now. We thought wrong. The stock market has a knack for resetting expectations when it's least convenient, and right before the holidays—when most are caught off guard—is a prime time for reversals. Instead of sending investors into January on a high note, the market served up a humbling dose of reality to accompany the holiday eggnog. The market giveth and the market taketh away.

On Friday, we received the PCE inflation report, which showed some moderation in November. While this might have been seen as encouraging, it wasn’t enough to move the needle on year-over-year inflation. Spending data did come in with a downward revision and a subsequent downside surprise, reflecting softer consumer activity.

The bond market quickly reversed some of the rate cut expectations after the report, and the stock market closed the week on a high note. After Wednesday’s FOMC, the Fed Fund Futures market was pricing in a 27% chance of an additional rate cut in 2025. Recall that this number was closer to six rate cuts back in September.

After the PCE report, the expectations for the additional cut jumped to over 60% before settling in at 55%. This is roughly double the previous expectation. As mentioned above, these rapid adjustments are expressed quickly in liquid markets.

The indexes jumped on Friday to recapture some of the week’s losses but closed off their highs. This could have been trepidation heading into the weekend with the government funding showdown, but that remains to be seen. After the market close on Friday, the Stopgap bill was signed to avoid the shutdown, keeping the government funded through March. This should serve as the last meaningful catalyst for the market as we head into the end of the year.

Let’s review the charts…

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