Eggnog

Last Friday the confetti bomb went off. Bulled up by suggestions across financial media that Central Banks had stuffed the turkey and glazed it in honey, retail money poured into the SPY, the $478 billion SPDR S&P 500 ETF, Wall Street’s oldest and most venerable passive product. The buying was off the charts, the highest one-day splurge on record. The context of the festive brouhaha of buying is laid bare by the pom-pom wielding strategists at Bank of America who point out that private client portfolios are basically all-in. Back in 2009, when the gun for the current bull market fired, equity allocations were a shade under 40%. Today, they are 60%. Stir in some beta analysis and the model spits out the startling statistic that portfolios are two and a half times more aggressive today, than they were at the bottom in 2009. And that exposure, as whispered by the media, is largely concentrated in just seven stocks. Diversification, like letter writing and opening doors for others, appears to be lost on the app-tapping investors of the day. Given all the war, the geopolitical grand standing, the re-routing of tankers, the hand-over-fist selling of US Treasuries by the likes of China and Japan, and the blizzard of other issues – notably prices that are still going up, albeit at a slower pace – it is quite a thing that stock markets are shuffling into year end with ATHs in sight; leaving strategists little wriggle room other than to forecast the customary 10%-ish upside over the coming year. Keep buying. Given all the eggnog spilling on shoes then, there is a temptation to buck the ‘narrative’. Gazing into the crystal ball, the Gazette suggests that 2024 will see oil barrel through $100, inflation to surprise to the upside, equities to finish lower and the deluge of issuance out of the US Treasury to scatter the pigeons. Energy and commodities, specifically precious metals as the bonfire of fiat debasement continues, will run hard. So too, uranium. All are largely ignored by institutions still labouring to align their principles to a new agenda. The US and the Mag-7 have peaked, letting EM and small caps off the leash. Governments will keep spending like glassy-eyed sailors, to the benefit of all things ‘infrastructure’. De-globalisation adds chocolate sprinkles to the cake. And diversification – in equity markets – will be back in vogue. Courtesy of a resplendent 15-year bull market, alluring marketing material from fee-squeezed money managers, and bragging in the spike bar, many portfolios will be exposed as being far too concentrated. More so if the passive bubble, perhaps the biggest of all, goes POP.

Happy Christmas.