Market Update: The Butterfly Effect

By Morgan Christen
CFA, CFP, CDFA, CEO and CIO

Welcome,

I just upgraded my skis, bindings, boots and poles for the 2024 ski season. It had been some time since I last updated my gear so I was excited to be on the latest and greatest.

The shop had me fill out the height, weight, age and ability questions to properly set my bindings. These answers would help them in setting the DIN (Deutsches Institut fur Normung / German Institute for Standardization), or scale of release force for my ski bindings.

If you have rented or bought skis before, you may remember there are three Roman numerals I, II and III, for beginner, intermediate and advanced. I picked III as I have skied for years. The technician let me know that I would be immediately downgraded one level.

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Wait, what?

Apparently, the standardization board has determined those of us over 50 have bones that are not as strong as when we were 49 and younger so they make the tension easier on us.

I was downgraded to a II, or a DIN of 8, which seems random and maybe a bit discriminatory. When I drop into a chute, I want my bindings to hold – my old bones can take it.

But enough of my first world problems; let’s explore other random issues.

Back in 1961, a meteorologist by the name of Edward Lorenz created a weather model with 12 variables used to forecast future weather. What he realized was that the simulation was highly sensitive to the initial conditions.

Chaos theory emerged, where things that were once thought random actually had patterns. This was the ‘Butterfly Effect’ – one small change could have large consequences. The metaphor often used is a butterfly flapping its wings in Texas can cause a tornado in Brazil.

Today, the 900-pound butterfly in the room is the Fed and what action will they take on rates. With the Fed essentially declaring victory on inflation last year, stock investors started to salivate at the prospects of lower rates in 2024. The initial conditions for the run at the end of 2023 were lower rates in 2024. But are investors making an error in their measurements?

True, most indications show inflation slowing down, but the world’s trading routes are flapping their wings – not only the Suez Canal, but also the Panama Canal.

Iran through their intermediaries have disrupted the flow of container ships in the Suez Canal, causing shipping companies to take the longer route around the Cape of Good Hope. Meanwhile, the Panama Canal has reduced traffic by more than a third due to drought conditions.

Will this cause inflation? Remains to be seen. But the trade route butterfly just flapped its wings, and we hope that markets have not got ahead of themselves. We see excitement predominantly in the magnificent seven as they have pushed markets higher. Should the Fed remain steady on rates, markets may not be happy.

Après Thoughts

Election years are usually good for markets, as the incumbents want to make sure the economy is humming. Jobs are still plentiful, and the Fed may be accommodative and do a couple of rate drops.

However, as we have talked about in the past, do not abandon good old diversification. Bonds and dividend payers should hold up nicely in multiple scenarios as will my over 50-year-old bones on Scotty’s (Mammoth).

As always, we are here to help you navigate these markets; small changes today should have positive impacts in your future. Flap those wings. It is still early in the year and a good time to nail down your financial New Year resolutions; give us a call.

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DISCLOSURES

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Stock is the capital raised by a corporation through the issue of shares entitling holders to an ownership interest of the corporation. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money. Diversification neither assures a profit nor guarantees against loss in a declining market. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice. Information may be dated material. Charts notated with source.

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