The Mag 7 Turns to the Dynamic Duo

Since OpenAI debuted ChatGPT on November 30, 2022, the technology sector has been on a historic AI-driven rally, with the NASDAQ-100 Index gaining over 145% (through June 5, 2026). But within tech, the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) has generated even more eyeing popping returns, as a group gaining 379% (assume an equal-weighted basket that is not rebalanced). These seven stocks have a collective market capitalization of $23.8 trillion, approximately 35.2% of the entire S&P 500 market cap.

But since the start of 2025, five of the seven stocks in the Magnificent 7 have started to fade. After gaining 106% in 2023 and 79% in 2024, the above Magnificent 7 basket rose a 'modest' 26% in 2025 and is up just 3% YTD. Only Alphabet and Nvidia are outperforming the S&P 500 over the past 17 months, 5 days. In fact, Meta, Microsoft, and Tesla are barely holding on, either flat or actually negative since 2024, as shown below.

Source: Total Real Returns and Mentabye calculations. As of June 5, 2026.

Compare that to the 2023-2024 period, when all the Magnificent 7 stocks were blowing past the S&P 500, especially Nvidia which gained 820%! Perhaps the frenzy around AI is starting to cool? Or is the Mag 7 is really becoming the Mag 2? 

Source: Total Real Returns and Mentabye calculations. As of December 31, 2024.

A Golden Year

Tomorrow will be first trading day of 2026. So, it's a good time to look back at how different asset classes performed in the past year. 

Equities continued to surge ahead in 2025, once again powered by AI. The S&P 500 and NASDAQ Composite gained 18.7% and 21.1%, respectively continuing a run that began in November 2022 after OpenAI debuted ChatGPT. The two U.S. indices have now cumulatively returned 87.5% and 127.0%, respectively, over the past three years led by the likes of NVIDIA, Alphabet, Microsoft, and Meta. International stocks did even better last year, with the Europe's STOXX 600 Index rising 36.8% and the MSCI Emerging Markets index up 33.4%. Yet, for all the strong showing among equities, 2025 was really gold's year to shine. The yellow metal, long thought of as safe haven asset and inflation-hedge, soared 62.2%--its strongest annual performance in over four decades. Gold's powerful rally was driven by a number of factors, including a weakening dollar, aggressive central bank purchases, persistent inflation concerns, and geopolitical uncertainties. Livestock was another strong performer, as U.S. herd size shrank to its lowest level since 1951. 

On the other hand, oil and the U.S. Dollar weakened substantially in 2025. Oil's slide was primarily due to oversupply in the market after OPEC + increased production; U.S. shale boom and the emergence of new oil sources in Brazil, Guyana and Norway further contributed to the supply gut. The Dollar Index, which measures the greenback against a basket of foreign currencies, was down 9.4% last year largely as a result of President Trump's tariff policies and Fed rate cuts. Lastly, bitcoin stumbled after several years of strong performance...because? Well, who really knows--it's crypto! It was probably the usual mix of leverage and liquidations and perhaps investors' eagerness for gold, rather than crypto, to diversify away from traditional assets. In any case...here's summary of the winners and losers in 2025 (in USD):

Source: Bloomberg. As of December 31, 2025 (click to enlarge)

The asset class returns quilt below also shows how these same strategies performed over the past few years. Equities and crypto have generally been the consistent winners since 2020, but there have been some meaningful rotations into real assets, such as gold, oil, grains and cattle over the years (in USD).

Source: Bloomberg. As of December 31, 2025. (Click to enlarge)

Where's the Beef?

The stock market has been roaring since OpenAI introduced ChatGPT in November 2022. AI-mania has powered the S&P 500 to gains of more than 20% annually over the past three years. But something decidedly less hi-tech has performed even better: beef. The CME Cattle Feeder Index, which tracks the price of steers sold in the U.S., has gained 21.5% annually over the same period. The outperformance is even bigger over 5 years. Business is good for cattle ranchers and livestock speculators! 

Source: CME and Mantabye. (Click to enlarge)

Such gains may not be a surprise to most Americans, who consume a lot of beef (83 lbs per capita per annum). And many don't like it! Newspapers and television have screamed about runaway beefs prices. According to the St. Louis Fed, ground beef prices touched $6.63/lb in August 2025, up from an average of $4.23/lb pre-pandemic. Yes, while the latest 'bull' market in stocks started in late 2022, the literal bull market took off after the pandemic. Per the WSJ, cattlemen are now making a record profit of "more than $700 per animal, up from $2 five years ago."

And it comes down to basic supply and demand. Ranchers across U.S. had started selling off their herd several years ago as chronic drought, costs, and debt pressured the business. Losses peaked during Covid-19 when many meat processors and restaurants shutdown, backing up livestock inventory and driving down cattle prices. While beef demand is strong, many ranchers have held back from increasing the size of their herds. As a result, U.S. cattle inventory totaled ~87 million as of January 1, 2025, the lowest since 1951. Back then, the U.S. population was 153 million; today it's 343 million. You do the math.

Source: WSJ and Agriculture Department. (Click to enlarge)

As shown above (and below), the U.S. cattle industry began herd liquidation in 2019 when inventory reached 95 million head. According to Beef Magazine, liquidating inventories is one phase of the cattle cycle that typically extends for 10-12 years with "expanding and contracting cattle numbers driven by changes in producer profitability and worsened by drought." While strong prices suggest "there are incentives (for ranchers) to begin rebuilding (their stock)...signals for expansion remain muted at this point." The WSJ article noted many ranchers are looking to pay off longstanding debt and upgrade equipment with their profits rather than growing their herd; they are also wary of inflation that makes livestock feed more expensive.

Source: WSJ and Agriculture Department. *Estimates are for January of each year. (Click to enlarge)

Industry analysts are unsure how long this 'bull' market will last, but it appears the livestock trade still has some ways to go. Tyson Foods and JBS, two of the world's largest meat companies, estimate cattle supplies could edge up in 2027 or 2028. Beef Magazine feels "structural constraints, input costs, and financial considerations will likely delay a rapid recovery in beef cow numbers." Moreover, they estimate that the herd rebuild this cycle "will be slower than the last rebuild that began in 2014...(which) is likely to mean relatively tight supplies and support for cattle prices for the next few years." So, the trade for 2026 is to still be bullish on beef!

Did Time Magazine Just Jinx the AI Trade?

Last week (on December 12), Time magazine named the 'Architects of AI' as its Person of the Year ("POY"). It's an annual tradition going back to 1928, when the magazine's editors select the person(s) "who wielded the most influence in the previous 12 months." Of course, Time is not the publication it once was; it currently has a weekly circulation of around 1 million, down from a peak of 4.1 million in 2003. But Time's POY cover still attracts significant attention. This year was no different, with thousands of news outlets covering the announcement (just ask Gemini!).

This year's selection was about the group of people who are responsible for developing and bringing the transformative technology of AI to the world (or so they want you to believe). The cover, shown above, has the CEOs of leading tech companies in the AI landscape sitting on a steal beam high above midtown Manhattan replicating the classic 'Lunch atop a Skyscraper' photograph from the 1930s. Left to right, it features: Mark Zuckerberg (Meta), Lisa Su (AMD), Elon Musk (xAI), Jensen Huang (Nvidia), Sam Altman (OpenAI), Demis Hassabis (DeepMind, owned by Google), Dario Amodei (Anthropic), and Fei-Fei Li (Stanford). The picture has a deeper symbolism that we'll get to later. But one thing is for certain, since OpenAI debuted ChatGPT in November 30, 2022, the stock market has been on a tear. The tech-heavy NASDAQ has rallied 102% over the past three years largely on the promise of AI. So now, investors are fretting Time may have just jinxed this stock market rally with its 2025 pick. Call it the magazine-cover curse, but as Jim Bianco of Bianco Research noted in an X Post: Time's POY choice has a history of being "an excellent contrarian indicator." Yikes!

The premise behind the indicator is that when a magazine finally devotes its cover to a person, company, or theme, said subject or topic is usually past its peak. This idea was invented by Paul Macrae Montgomery and consisted of three primary rules:

1. The magazine must be mainstream--not a business/economics/finance publication that routinely features emerging capital market trends. 

2. The cover subject is a widely talked about or experienced concept/theme.

3. There must have been significant asset-price gains leading up to the cover.

Check, check, and check (Time, AI, and a sustained AI-fueled stock market rally)! So, is it time to sell Big Tech? Maybe, but before we do let's look at how well this indicator actually performs. Brent Donnelly, President of Spectra Markets, a financial media and analytics company, has done empirical work on the magazine cover indicator construct, including that of Time's POY edition. There have been 98 such covers since 1928 and Donnelly identified eight prior occasions when a corporate head, CEO, or industry was honored and where there was identifiable stock performance to track. E.g., in 2010 Mark Zuckerberg was selected Person of the Year, but Facebook (as Meta was then known) was still a private company. Below is Donnelly's list of Time's chosen corporations, CEOs, and specific industries and associated stock performance prior to and after being featured (click to enlarge):

Source: Spectra Markets

What Spectra's analysis shows is that 87% of the time companies lost value in the 12 months after being 'honored' with the POY recognition. And 75% of the time they kept losing value even after 24 months. Andy Grove (and Intel) was the exception back in 1997 (oh but how the company's fortunes have changed today). While the results appear to validate the magazine cover curse, they are based on a very small sample size. Can we say these results are statistically significant?

To find out, we defined our null hypothesis (H0) as: The average return of stocks featured on Time is not statistically different from the average return of the S&P 500 (the market benchmark) and tested it to see if we could reject the H0. The results are detailed in the table below (click to enlarge).

Source: Spectra and Slickcharts.com for stock and S&P 500 returns, respectively; Mantabye for all calculations.

As the calculated t-statistic for the 12-month case is greater than the critical t-value, we can reject the null hypothesis for that period (though that's not the case for the following 24-month case). The result provides statistical evidence that being selected Time's POY has a negative impact on subsequent one-year stock performance. So, we'll try to keep a close eye on the performances of AMD, Alphabet, Meta, Nvidia, Tesla, and Microsoft in 2026! (Yes, MSFT...while Satya Nadella is not in the above picture, Microsoft owns 27% of OpenAI and its stock price has almost doubled in value since ChatGPT was launched.) 

Back to Spectra Market's table and the Time magazine cover. Brent Donnelly provides important context to Chrysler and RCA's POY selections in 1928 and 1929, respectively. In the late 1920s automobiles were a transformative technology that helped propelled markets higher (sound familiar?) and RCA was "at the center of that tech bubble that led to the Crash of 1929." (During the 1920s, RCA stock rose in price 200-fold, one of the largest increases in the history of the stock market--it would go onto lose 98% of its market value by 1932.) 

Oh, and that famous Lunch atop a Skyscraper photo that the Time POY cover recreates...it was taken on September 20, 1932, on a steel beam of...the RCA Building!

The (Not So) Magnificent 7

The Magnificent 7 companies: Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia, and Tesla have been a dominant force in U.S. equity markets over the past few years, helping propel the performance of the S&P 500. Last year, these seven companies accounted for 48% of the benchmark's 23% price return. 

But their start to 2025 has been less inspiring, with same companies as a group returning -6% YTD (Jan, Feb). The S&P 500 as a whole is still up a modest 1.2% YTD. However, back in 2022, when the Mag 7 fell 40%, it pulled the S&P 500 down 19%. Without the Mag 7, the S&P 500 would have returned -8%. Maybe the pendulum swings back the same way in 2025. Given that these companies are collectively now a bigger weight of the S&P 500 at 30.6% than in 2022 (24.1%), the impact of a Mag 7 decline would be even more. 

Instacart: The Early Bird Gets the Worm?

The IPO market has largely been dormant for the past 18 months. However, hopes of a revival were kindled recently as several high-profile companies went public in the last two weeks, including pandemic darling Instacart.

 

                                         Source: stockanalysis.com. *Includes REITs, SPACs, closed-end funds, ADRs, 
                                         banks, limited partnerships and trusts, **Thru 9/22/2023.

The grocery delivery service's IPO on Sep 19 was priced at $30, valuing the company at ~$10 billion. That was far below its (infamous) March 2021 funding round which valued the company at astonishing $38.5 billion!! Oh, 2021. Now, $30/share seems to be a fair price according to valuation guru Aswath Damodaran in a detailed analysis of Instacart's business model. And the market agrees? After a strong debut (gaining 43% on its first trading day), Instacart fell back to its IPO price within a week.

Regardless, Instacart was estimated to have raised $660 million from its IPO, with all three of the company's co-founders cashing in: "Brandon and Maxwell Leonardo sold 1.5 million of their 7.8 million shares, pocketing about $43 million each, while former CEO Apoorva Mehta sold 700,000 of his 28.9 million shares, netting $21 million. Mehta, a great example of entrepreneurial grit and perseverance, is now worth an estimated $1.3 billion. Prettay, prettaay, good. So, who were the other winners from Instacart's IPO, if any?

The chart above (click to enlarge) shows Instacart had a lot funding rounds (up to Series I) and many investors. But if you didn't get in early, you didn't do too well. Series F and later investors lost money outright, but it gets even worse if you consider relative performance. As this table (click to enlarge) from Damodaran's analysis demonstrates: 

Source: Aswath Damodaran (aswathdamodaran.substack.com)

As per Damodaran, the seed capital providers Khosla, Canaan and Y Combinator will have earned a 55% compounded annual return on their original investment...well in excess of the S&P 500's annual return of 13% over the same period. Or put it another way that's an 80x (gross) return vs 3.4x for the S&P 500. Nice! If the typical VC seed investment in 2012 was about $600-$700K, then that's a potential gain of around $50 million! Silicon Valley's pre-eminent VC firm, Sequoia, will have done even better, earning 62% on its 2013 Series A investment of $8 million as per the WSJ; that's a potential gain of over $600 million--cha ching!! Andreesen Horowitz ("a16z") will have earned a 29% annual on its 2014 Series B investment (on a $15-$20 million investment, that would be a potential gain of $100-$150 million). 

After that things start to unravel...all investments in Instacart made after 2015 have underperformed the S&P 500 significantly, and the NASDAQ by even more. In fact, any investment made after 2018 generated an (unrealized) dollar loss! Hedge fund crossovers, Tiger, Coatue, and D1 underperformed but so did established VCs like DST Global and General Catalyst, who invested $75 million and $50 million, respectively. The worst off possibly was T. Rowe Price, whose growth fund invested $86 million in 2021. That investment has lost more than half of its value. 

To be sure, firms like Sequoia have invested in multiple rounds, taking some of the shine off their early perspicacity. But the success of those early rounds more than makes up for the losses of the later rounds. Sequoia, in fact, invested $300 million across all funding rounds prior to Instacart's IPO and currently owns more than 15% of the company; its stake is estimated to be worth over $1.5 billion. Interestingly, perhaps aware that a successful Instacart IPO was needed to help thaw a frozen IPO market for their other portfolio companies, Sequoia and other VCs agreed to buy up to $400 million worth of shares sold in Instacart's IPO, accounting for ~66% of the total proceeds. Unless they immediately sold, they are essentially holding those shares at cost less than a week later. 

Ultimately, Instacart's IPO was an expensive lesson in market timing and herd mentality. Yes, the early bird does get the worm...but habit rules the unreflecting herd. Invest carefully.

Inflation: Is 2022 the New 1980?

Yesterday's CPI report upended a narrative that had taken hold in recent weeks by (ever optimistic) sell-side analysts and strategists (see one prime example here) that inflation had peaked. After headline CPI for April fell to 8.3% year-on-year ("YoY") versus 8.5% in March, many CNBC guests were selling the idea of a soft landing and new bull market in stocks. Not so fast...here's a summary of the May report: 

• YoY headline inflation reached 8.6%---a fresh 40-year high vs 8.3% consensus
• Worse, core CPI (excluding the more volatile food and energy components) was up 6.0% vs 5.9% consensus 
• Goods inflation was just 1.7% of the 8.6%; declining as supply chain disruptions moderate. However, service inflation was up 3.0%---the highest rate in 4 decades. (Click chart below to enlarge)
  
  
  
   Source: Zerohedge

Not surprisingly, the markets did not react well. The S&P 500 and NASDAQ Composite were down 2.9% and 3.5%, respectively, on Friday. The two benchmarks are now down 18.7% and 29.4%, respectively, from their 4Q21 peaks. And for the tech-heavy NASDAQ there are real shades of 2000, as shown below. After 140 trading days, or ~6 calendar months following the peak, the NASDAQ of 2000 and the NASDAQ of 2021 are tracking each other almost to the percentage. As reminder, the NASDAQ eventually lost 80% of value following the dotcom bubble. 

                                                                Source: Yahoo Finance, Mantabye

 

We'll at least inflation is nowhere near as bad as in the 1980s, right? Nominal inflation was after all running over 14% YoY in early 1980. Or was it? Larry Summers, who correctly warned about inflationary pressures last year, is now cautioning that inflation may be worse than what the official numbers show. How's that? In a new paper, Summers and co-authors Marijn Bohuis and Judd Cramer, argue that prior to 1983, the CPI did not correctly account for consumer spending on housing. The authors claim that the way housing spending was measured pre-1983 was "without conceptual foundation...and resulted in a substantial upward bias in the CPI." You see, the pre-1983 index included both home purchase prices and the total outlay of mortgage payments, despite mortgages being paid out gradually over several years." Summers and colleagues argue that "this caused inflation measures before 1983 to look artificially high at the beginning of the tightening cycle, and to recede artificially fast." According to Summers, Bohuis, and Cramer ("SBC"), when the alleged problem with housing spending is removed the official inflation rate of 13.6% in 1980 falls to 9.1%. That's just 50 basis points higher that yesterday's reading. Yikes! 

The upshot is that if SBC's methodology is accurate, it could mean that Federal Reserve will have to get far more aggressive to bring inflation under control, despite recession risks, like Paul Volcker did. For example, SBC estimates that "a return to 2% core CPI inflation today may require nearly the same amount of disinflation as achieved under Chairman Volcker." As reminder, Volcker’s monetary tightening increased the federal funds rate up about 10 percentage points, to a peak of 20% in the early 1980s to bring core CPI down by 5 percentage points. So, by that logic, bringing core CPI down from 6% to 2% may require hiking the feds fund rate by 7-8 percentage points! Good luck with that!

NASDAQ: Now and Then

The stock market had a very bad day yesterday, as well as a very bad month...and, oh yeah, a historically bad start to the year. The S&P 500 was down 3.63% on the day, 8.8% on the month and 13.3% YTD, the worst 4-month start to a year since 1939 (-17.3%). But the S&P 500's tumble was not nearly as bad as that of the tech-heavy NASDAQ Composite. The Composite was down 13.3% in April, its worst month since October 2008 (remember Lehman?) and 21.2% YTD, its worst start to a year ever. Below is a chart of the Jan-Apr returns of the NASDAQ Composite since 1999:

                                                Source: Macrotrends.net, Mantabye

Jan-Apr 2022's NASDAQ drawdown is 50% worse than the Composite's 2001 drop over the same months...and that was during the middle of "dot.com bust." Could this be the start of dotcom crash 2.0? Until this earning season, the resilience of Big Tech (Google, Microsoft, Apple, Amazon, etc.) had been supporting the broader indices. But even by early March the damage below the surface was extensive, as this chart from the SocGen and the FT shows, with over 60% of the NASDAQ's underlying, mostly technology, stocks down at least 25% and 40% of stocks down more than 50%.

                                                    Source: Societe General, FT
  

As the FT's Robbin Wigglesworth wrote: "For companies that are sustained more by dreams than cash flows, 2022 has been a nightmare. For those that scoffed at the last two years of excesses in markets, it has felt like sweet vindication." And that was in March.

Well now, Google has missed, Amazon incurred its first quarterly loss since 2006, and Apple has warned of weaker earnings ahead. We're sure the MAAMAs will be okay, perhaps after giving back most if not all of the pandemic gains. But for many unicorns this could be a replay of 2000? The chart below shows how the NASDAQ has behaved after reaching their 2000 and 2021 peaks. After 110 trading days (~5 months) we are in the same position.

                                            Source: Yahoo Finance, Mantabye

Where will the NASDAQ go next? Who knows, but here's what happened in 2000 over the following five months after this point. Of course, it's different this time, right?

                                              Source: Yahoo Finance, Mantabye

Is the Climate Change Tax Here?

What a change a year makes. At one point last year early in the global pandemic, oil prices plunged into negative territory! The S&P 500 Energy index was down 50% in Q1 2020 and finished the year down 34% even as the broader market rallied 18%. This year the story is very different as synchronized global fiscal and monetary stimulus has jump-started the global economy. Oil prices have risen sharply YTD from ~$43/bbl to ~$73/bbl and Energy is, by far, the best performing sector.

While there's always noise around Energy prices, Goldman Sachs notes the seeds of the current spike in energy prices can be traced back to years of under investment in long-cycle projects. Large scale oil & gas investments were shelved due to a combination of poor energy returns and ESG concerns for nearly a decade, as shown below. 

Instead capital flowed more to short-term investments in shale and renewables. Solar and wind are great, but the technology hasn't really caught up with the demand. The basic issue of intermittent power supply remains--what do you do when the sun doesn't shine and or the wind doesn't blow? So, you still need oil, natural gas and coal, and a lot of it, to keep up with growing energy demand.

Environmentalists have long pined for an explicit carbon tax to reduce fossil fuel consumption. At least 27 countries, including many EU countries and even China, have one. But here in the U.S., Congress has never seriously considered it. Rather the movement for clean energy has been driven by the private sector and individual states with sometimes very aggressive mandates. All good. But going green and also not paying more at the pump during the transition phase was always going to be difficult. And as energy demand is rising the structural supply constraints are becoming clearer. The likely result is more volatile energy markets in the future. In effect, a unintended carbon tax? 

August Score Card: Which Assets Won, Lost?

August is over and summer is almost done...so back to school, back to the office (?), and back to volatility?? September is traditionally the worst performing month of the years for stocks; more on that here. But first, let's recap things for the month that just ended. Deutsche Bank (H/T Zerohedge) has a couple of interesting charts (click to enlarge):

August:

Portuguese stocks had a blistering month, up 9% on the month, with about a third of the gains coming in the last five days. Why? Not sure, maybe everyone in the country loved Ronaldo's move to Man U? More generally, it was a pretty, pretty, pretty, good month for equities. Most of the left side of the chart is dominated by stocks, developed and emerging markets alike. In fact, global equities advanced for a 7th consecutive month, with the S&P 500 (+3.0%) and the STOXX 600 (+2.2%) both recording solid gains. On the other hand, the right side of the chart is populated by commodities. Copper, Brent, Silver and WTI were all down 2%-7% on the month, probably due to concerns over slowing demand in China and a stronger dollar.

YTD:

But if you've long commodities, it's still been a great ride so far, particularly for oil speculators. Oil started the year at around $48/ barrel and is now at $69/ barrel and remains the top performer among the major asset classes on a YTD basis, with WTI and Brent crude both up +41%. Copper is up ~25%. However, not all commodities are popular. Gold, and especially silver, are having a tough year...even with the biggest threat of inflation in 30 years? Huh? Damn you, Biiiiiiiiiitcoin!? Equities are right behind oil and copper; particularly bank stocks that are likely to benefit from rising rates, with growing net interest margin.

Apple is a Massive Company

Apple is the biggest company in the world with a market capitalization with $2.4 trillion, as of yesterday. That's a lot of company. How much is a couple of trillion of dollars? This chart from the Visual Capitalist puts Apple's size into context:

In fact, Apple's market cap is bigger than the economies of all but seven countries, according to the IMF:

And it's not just the company's market cap that's hard to contextualize. The company just generates so much cash...it's a veritable money machine. As of Q1 2021, Apple was sitting on ~$200bn of cash and bonds!! Again, how big is that? How many companies can Apple buy?... Umm, Apple's cash pile can be used to buy 460 of the S&P 500 companies!

All the more reason this story about Elon demanding to be Apple CEO in return for receiving rescue financing to save Telsa is just so outrageous, but also just so "on brand" for Elon.

Hedge Funds Have Decent January, Despite GME

GameStop was one of the most shorted hedge funds names coming into January. And last month's epic short squeeze that we wrote about (here, here and here) cost a number of big-name funds, like Melvin Capital, D1 and Point72, bigly--as they say. 

The S&P 500 was flying high up to the week of the squeeze. The equity benchmark was up 2.6% through Jan 25, before closing the month down 1.1%. So, we figured the pain would be felt broadly across hedge fund land...but, so far, Jan HFRI hedge fund returns suggests the damage was limited to a select group of funds with the HFRI Fund Weighted Composite Index, the widely cited hedge fund benchmark, up 0.78%. 

So, most hedge funds did well last month, at least the ones reporting early! Perhaps because it wasn't just WSB driving up the GME price, other hedge funds were in it too, amplifying the rally. (And, of course, Robinhood's liquidity issues shut out retail investors for a time which helped hedge funds.) True, the HFRI Equity Market Neutral Index was down 0.53%, but given this leveraged strategy is one of the most vulnerable to short squeezes, we're surprised (shocked even!) that losses were so...umm, pedestrian. Well, in any case, good for you hedge funds! You came out of a difficult month in good shape. 

Venn has a good recap of the factors that drove equity returns and, of course, Crowding was the biggest driver (click to enlarger).

As shown, the Equity factor was down 0.17% on the month. It was actually up 3.5% through Jan 25 on good vaccine news, but gave all of that back and more in the last week. And there was a LOT that went on within the Equity factor. First, Crowding had its worst month on record--of course! Hedge funds often herd into the same names on both the long and short sides...because differentiated strategies are,  well, rare...and there was broad degrossing in the last week of January. 

In a short squeeze, some things have to go up...and the Small Cap factor had one it best months ever (94th percentile) gaining 3.4%. Small Cap and lower quality/ higher risk stocks are often the most shorted, so makes total sense. Conversely, Low Risk stocks on the long side would have been sold in a short squeeze (because you know, (i) margin calls, and (ii) "hedge" funds...need to be hedged) and that factor had a big down month (11th percentile).

Separately, Macro factors related to inflation-expectations, also had a great month. The Inflation factor rose 2.1% (90th percentile) and the related Commodities factor gained 1.8% (84th percentile) on rising energy and agriculture prices. Interestingly, Macro hedge funds had a mundane Jan, the HFRI Macro Index was up 0.23%--either funds were split on inflation expectations or just hadn't put on a lot of risk for some reason. 

All in all, a good start to 2021 for most hedge funds.  

This is Us: The Economy Under Democrats and Republicans

President Trump was very proud of the economy and especially the stock market, pre-Covid. While it's debatable how much influence Presidents actually have on the economy or financial markets, they are more than happy to take credit when things go well and ascribe blame to others when they don't. 

It is however interesting to see what how the data falls. Using data from the BEA and thebalance.com, we can get a sense of different Presidents' stewardship of the economy over the last 40 years (with the acknowledgement numbers alone never tell the whole story). Republicans fancy themselves as better financial managers. Yet the US economy has clearly fared better under Democract presidents, growing at 2.8% per year vs 2.3% under their counterparts (click to enlarge):

From Reagan to Trump, the US economy has grown around 2.5% per year, on average. Breaking the data out by the Presidents themselves, the economy grew fastest under Clinton (3.9%) and Reagan (3.5%) and below trend over the others' terms. (The data for the Trump years include CBO's GDP projections for 2020)

Yes, Trump faced a once-in-a-century calamity. But even without 2020, the economy grew only at around 2.5% under his administration. Basically on trend.

Obama also faced a grave economic crisis in his first term. Excluding 2009, the economy grew about by 2.2% per annum on his watch. Not as good as Trump, pre-Covid (...though Obama and Biden will make the argument they laid the foundation for Trump's economy).

But what about the stock market? Which increasingly has little relation to the real economy but nonetheless is still held as a barometer of economic health and consumer sentiment ("...it's forward looking"). Don't investors favor business-friendly Republican administrations? 

Not necessarily. The chart below shows the cumulative price returns of the S&P 500 under different presidents. Clinton (1993-2000) had the best stock market. He certainly rode the Internet Bubble and left just in time. "W" had the worst. He inherited the Tech meltdown on the way in (a consolation of sorts for internet "founder" Gore) and oversaw the subprime meltdown on the way out. The stock market actually performed much better under Obama than under Trump (through 12/24/2020) and even Reagan!

Can Biden nuture the economy back to health? We'll see...but if you're looking to the stock market for any indication (you shouldn't, but if you are)...then the verdict is in. The S&P 500 is having the best post-election performance in at least 40 years (more due to Pfizer, Moderna and the promise of easy money than anything else, but I'm sure the Biden folks won't mind taking some credit).

The Biden Stock Market Off to a Roaring Start

The stock market is fickle, frequently irrational and increasingly disconnected from the economy it is supposed to reflect...but for anyone keeping score (and the Trump Administration certainly did), the S&P 500's current post-election performance is the one of the best ever:

  

The Risk-free Tesla Arbitrage?

As many people know, on Monday the S&P 500 Dow Jones Indices announced that Tesla will join the S&P 500, effective Dec 21. The car maker will be the largest company ever to be added to the index, after its (so far) 600% run up this year pushed the company's market valuation over $460B. Adding a company this big to the index has its own set of challenges.

Regardless, the addition of any company to the S&P 500, let alone one the size of Tesla, is a huge deal. There is over $11.2T of assets indexed or benchmarked to the S&P 500, with index funds comprising $4.6T of the total. At its current size, Tesla is expected to comprise over 1% of the index. That means shoehorning Tesla into the S&P 500 on Dec 21 will force, at least, $50B of rebalancing. And that's where the arbitrage comes in.

The old adage in finance, and life, is that there's no such thing as a free lunch (except for diversification). Expected returns are proportional to risk. If there happened to some risk-free arbitrage opportunity it would quickly be bid away. But due to structural and behavioral reasons, sometimes near risk-free opportunities can exist. 

Pioneering quantitative strategist, Rob Arnott of Research Affiliates has shown that companies that get added to the index are typically 'hot' companies with lofty multiples, while companies that get removed on a discretionary basis (i.e., not due to M&A or other corporate actions) are usually deemed unimportant and are generally cheap. Arnott estimates that there is about a 3-to-1 ratio in valuation multiples between the added and deleted companies. In effect, when passive indexes (and some active investors) rebalance in response, they are buying high and selling low. Testing data from 1989 to 2017, Arnott found that

over the following 12 months, deletions, on average, outperformed discretionary additions, by 23%!!

Not bad, not bad at all. So will the trade of 2021 be shorting Tesla and buying the stocks it displaces? Of course, Arnott's analyses is about average returns for the strategy; any given trade may do the opposite...And many high-profile investors have been burned betting against Musk, who has a cult-like fan base.

Pfizer Vaccine 90% Effective Against Covid!

With Covid resurging around the world, Pfizer and German partner BioNTech had some great news today. The companies announced their coronavirus vaccine was >90% effective in preventing Covid-19 among people without prior infection. Scientists had been targeting a vaccine that was 75% effective, so the early results are very promising. (Dr. Anthony Fauci has said even a 50-60% efficacy rate could be acceptable). Pfizer board member and ex-FDA commissioner, Dr. Scott Gottlieb that a vaccine could be be available for limited use by Dec and wide distribution by fall 2021.

Markets were ecstatic, the S&P 500 was up nearly 4% mid-day. Financials, energy and transport stocks were the biggest winners, while Technology was the relative underperformer.

The US has been driving new cases in recent weeks, with the 7-day MA of new cases exceeding 110k. More than 240k people in the US have died from Covid-19.

                                    Source: https://www.worldometers.info/coronavirus/country/us/