00:00Let's first start off with the immediate and a lot of these short-term moves here and the idea of a market that seems to think that they've kind of figured this White House out, right?
00:09You make these grand threats at some point, you either renege on them or you dial it back to some degree or another.
00:15At least for today, it appears the market got it right once again.
00:18Yeah, you know, I would put the focus a little bit differently.
00:22We are in a midterm election here and you've heard the saying that, you know, elections are about the economy.
00:29There is a word at the end, it's in quotes, which means that that's what you should focus on.
00:37And what I would argue is, you know, we have a data series that asks people, how do you feel about the economy?
00:44It's called consumer confidence.
00:46And so I would argue presidential job approval ratings, which, you know, current president's approval ratings actually fell to a new low last Friday.
00:55At the end of the day, you know, what's going to drive is basically people's perceptions of the economy.
01:05And so it's kind of hard to imagine that we're going to do something that is bad for the economy and therefore bad for earnings and earnings, of course, you know, the anchor for the equity market.
01:17So I would argue, if anything, the bias will be the reverse.
01:22So I think the initial, you know, or the first set, I should say, basically of initiatives like putting a cap on credit card interest rates, you know, institutional investors not being in the housing market.
01:35But they're all aimed at the same thing.
01:38I'm not so and because of, you know, the approval ratings where they are and they haven't really moved up yet.
01:47I would expect such initiatives to basically continue.
01:51And so what you're kind of seeing basically in the equity market, looking at it from a positioning point of view is we've had the fundamentals based investors.
02:02We call them discretionary investors as opposed to systematic discretionary investors have been hugging neutral for six, eight months now.
02:11And so they're likely to sort of stay here, given the jitters and the risks that you spoke about a second ago.
02:20But, you know, even during these events in this period, our view and take was, you know, they're not going to suddenly go underweight.
02:29I mean, they've been sitting very because the risk is two sided.
02:32The memory of the speed and strength of the recovery from the Liberation Day.
02:36So when you talk about going underweight.
02:37Yeah, you're talking about you're talking about primarily.
02:40But they're unlikely to go underweight, overweight any time either, any time in the near future.
02:46So, you know, a lot of the price action is just coming from systematic strategies and what's happening to vol.
02:50And you just mentioned how the VIX just collapsed.
02:53So and we're not quite back to where we were, but it's not fine.
02:58Well, I want to talk a little bit more about the administration sort of reaction function here.
03:02What cues they're queuing off of, so to speak.
03:05So you mentioned, of course, approval ratings.
03:07That seems to matter to the president.
03:09How do you think his relationship with the market has evolved?
03:13Because, I mean, you think about how the notion of the taco trade even came about.
03:16It was this idea that President Trump would be restrained somewhat by the market reaction.
03:22And I mean, you take a look at just the past several weeks, the past several months.
03:27It seems that that's lessening a little bit, that correlation here.
03:31But I wonder what you make of it.
03:32So, I mean, there's, you know, other elements of the framework for thinking about this.
03:38And the other key one is, of course, you know, you're going to get these initiatives that might upset the market.
03:44But you're typically going to get them, which is a lesson from Trump 1.0, when the market's at a new high.
03:50We were at a new high very recently.
03:53So that is an emboldening, you know, aspect of things.
03:59So I think, you know, this game is going to go on.
04:05And the approval, I mean, the current approval ratings, you know, you can just look at history.
04:10The regression, Ryan, is pretty clear.
04:12Yeah, they've got to do something on the political front.
04:15Because, I mean, the current approval ratings, the current, you know, generic congressional ballot tells you that, you know, Democrats are on track to take 25 to 40 seats in the House.
04:26That's a big number.
04:27But I'm curious, though, as far as, like, the market fundamentals themselves, to a certain extent, independent of whatever the heck is going on at the White House and in Congress,
04:35we saw this big sort of embrace of small cap stocks.
04:38It seemed to kind of start towards the end of last year.
04:40It's been relentless at the start of this year, even on a day like today where you have an S&P up 1.5%, the Russell's up almost 2%.
04:47What is that about?
04:49Is that just valuation, bargain hunting, economic fundamentals, what?
04:53So I would actually say it's about something else.
04:56It's really what began with third quarter earnings, which, of course, we got, you know, into the fourth quarter, so late last year.
05:04And it's really about the broadening out of growth.
05:08If you, you know, rewind the tape to the second quarter, you have the S&P 500 delivering 9% earnings growth.
05:17And you say, wait a minute, you know, let me look at the 11 sectors in the S&P.
05:22So we're talking about 9% S&P growth, S&P 500 earnings growth.
05:26But we have only two sectors with positive growth.
05:31By the third quarter, that had become six.
05:34We are looking for fourth quarter earnings, which have just begun, basically, for nine sectors.
05:41So it's really about a broadening out of growth.
05:43That's, you know, where the small caps come in, number one.
05:47Number two, you know, we just talked about the incentives to try to get confidence up.
05:53So, you know, small caps are a beneficiary of that in some sense.
06:00And that's where you take aim.
06:01So there's other elements.
06:05I mean, S&P 500 is very top-heavy and very concentrated.
06:09This is less.
06:10So for all the things that are going on, I mean, one thing that we didn't speak about, so we talked about neutral positioning for discretionary investors.
06:19What is also very remarkable, and especially when you look at a chart, you say, that's just amazing, which is, if you look at sector positioning,
06:27so we had cap on interest rates, very bad for the financials.
06:31We had housing, bad for another part of the financials.
06:35You know, I can go on.
06:37There's a lot of, basically, you know, bombs in the foils that are, you know, appearing very suddenly.
06:45And so that's an incentive, basically, to pair positioning towards neutral also at the sector level.
06:52And what I would say is, if you look at our measure of positioning for mega cap growth in tech, it was obviously, you know, a notable, if not sizable, overweight.
07:03That has come down all the way to neutral.
07:07And if you look at the cyclicals, positioning was, you know, very short and underweight.
07:12So the small cap question, it has now risen, basically, up to neutral.
07:18So there's a lot of position squaring going on.
07:22And I would not have expected, basically, to see everything start going to neutral.
07:27But maybe that's where we go.
07:29If things quieten down on the administration side, then maybe people will go back to taking bets.
07:36But right now, the market, you know, fundamentals-based investors are positioned neutral.
07:42They've been this way for six, eight, ten months.
07:46And now we're seeing even sector positioning and bets coming off.
07:50So some of the beneficiaries of what you're saying, what we're seeing is just really a covering of those underweights for the new environment.
07:57It's a fundamental underpinning, which is the broadening of growth.
08:00It's happened so far very clearly only for one quarter.
08:04So we have to see.
08:05But our expectation is it continues in the fourth quarter.
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