'Santa Claus Rally' Started Early, Dawson Says

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00:00What new highs we can have when it comes to equity markets next year?

00:04Well, good morning and Merry Christmas. I think it's time to dust off the old adage,

00:08which is respect the trend, but don't ignore the risks as we go into 2026. Respecting the

00:15trend appreciates the fact that we're still very much in an uptrend in this market. And it's also

00:19being led by pro-cyclical areas. You mentioned industrial commodities earlier. You also have

00:25leadership in things like banks as well as transport starting to turn higher. So there's

00:31a pro-cyclical message coming out of this market. And you also have a very important uptrend in

00:37earnings estimates and GDP estimates. And this has been the key fundamental underpinning as to why we

00:42keep being able to press to new highs. As long as you're revising estimates higher, that's usually

00:48a good environment for risk-taking. So the second half of that is don't ignore the risks. And that's

00:53where we look at things like valuations. We look at signs of things like complacency within markets,

00:59look at the VIX turning ever lower each and every day. And so it could be in an environment where

01:05we're still able to carve out new highs because of those earnings estimates. But there could be

01:09some volatility in CHOP along the way, simply because you have a high bar with valuations and

01:15a high bar with expectations as well.

01:18But you still think positioning is not yet stretched. What would get us to that point?

01:23Our favorite measure is looking at the Deutsche Bank consolidated equity positioning. And this is

01:28really measuring institutional positioning. And what's fascinating there is that we're in the 62nd

01:33percentile, which is just about slightly overweight. But if you look at discretionary investors,

01:39they're still just neutral. And so we think that there's still room for more people to get dragged

01:44into this market. But if we're talking about positioning, we also have to mention households

01:48as well. And that's where you cannot make the argument that people are underweight equities.

01:52You can look at the AAII survey that looks at equity positioning. That's at the highest level

01:58it's been since peaks like 2018 and 2022. We've talked a lot about how margin loans have grown

02:05extraordinarily over the last six months at about a 40 percent clip. So there are certainly signs that

02:11households are very fully invested, but some institutional investors have still sat on the

02:16sidelines, which just is likely why over the last six months or so, every dip has gotten bought so

02:22rather quickly. Yeah. Talk a little bit more about that money that's sitting on the sidelines,

02:27the dry powder, if you will. We've talked a lot in the past about money market funds and how there's

02:31more than $7 trillion of money just sitting there waiting to be deployed. Maybe retail investors are

02:38fully invested, but that doesn't take away from the fact that there's always that possibility they

02:43could put more into the market. How are you thinking about what it would take to get that

02:48money to be put to work? Yeah, we've never considered the money market funds as exactly

02:53fungible funds that could go into equities, meaning that these were savings and cash balances that were

03:00typically held in cash savings accounts versus just things that were anxious and waiting to go into

03:06equities. Maybe at the margin, as you see those money market funds start to fall, it does incentivize

03:12people to look for other investments, but it's not necessarily a direct line straight into the equity

03:19market. So certainly money market rates falling could push investors into looking into other areas

03:25instead of just sitting on the sidelines and clipping coupons, but not necessarily $7 trillion of a wall

03:30of money that will go into equities. So the center rally that we have right now, how much of it is

03:35driven by technical factors like positioning versus true fundamentals, earnings growth and the

03:42earnings outlook for 2026? Yeah, this time of year, we try not to read too much into the price action,

03:48given volumes being so very light. And we do know that there tends to be some kind of window dressing

03:54and positioning chases into year end. And what's really fascinating is that we saw the rotation in

04:02leadership start a little early this year. Typically, we see leadership rotations where you have your

04:07classic dogs of the Dow or the last shall be first trade that kicks off in January as people start to

04:13rebalance portfolios in a new tax year. But it seemed to start in November this year where we saw value, for

04:21example, outperform growth by 5% since November 1st. So maybe people are trying to get a little bit ahead of

04:28that. But at the end of the day, we try not to read too much into very end of year kind of price

04:34action, simply because it doesn't reflect anything more than likely just positioning chasing.

04:40Cameron, when it comes to the commodity space, if you look at what happened this year across the

04:44entire spectrum, gold, silver, platinum, copper, do you look at that and you think you have to maintain

04:51part of this into 2026? Or do you think individuals should make sure that commodities are part of their

04:56portfolio? Yeah, we see commodities as a way to have an inflation hedge within portfolios. And they

05:04work really well when they work well, and they don't work so well a good portion of the time. So

05:09certainly, we've been in an environment where that has been a very powerful uptrend for a lot of these

05:15commodities. I think the question is, how much can it continue? Jeff de Graaf of Renaissance Macro put out

05:20a great piece effectively saying, hey, when you've doubled your return in less than two years, the

05:26probability of you doing it again is extraordinarily low. So it gets back to this kind of overall notion

05:33of respecting uptrends and not ignoring risks. Gold isn't a very powerful uptrend. We've been calling it

05:39the Chuck Norris of commodities. Nothing seems to be able to keep it down. It doesn't even touch its 50-day

05:44moving average. But if you look at longer term charts, it is extraordinarily overbought. So it

05:50wouldn't be surprising to see some kind of consolidation. But we do know that there still

05:55remains very powerful drivers of, for example, central bank buying of gold, but also appreciate

06:01it has become somewhat memefied, meaning that it has become effectively a momentum stock. You're seeing

06:08a lot of trading and retail investors, as well as investors overseas. So it could get a little bit

06:14over its skis and consolidate, but the uptrend is still very much there.

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