Welcome to Nasdaq trade talks,
where we meet with the top thought leaders
and strategists and emerging technologies,
digital assets, a regulatory
landscape and capital markets.
I'm your host, Jill Malandrino,
and joining us this afternoon, we have Brian Stetson,
managing partner at Equity Investments, and Mike Ko,
CNBC contributor and strategist at yield ETFs.
We're here to discuss market volatility
and sector rotation.
We're also going to meet with Chris Krueger,
president of Standard of Care,
on mismatches with retirement planning.
Lots to unpack here. It's great
to have the three of you with us.
Let's discuss volatility rotation and financials.
We're certainly seeing compressed volatility VIX
relatively near lows.
And this recent rotation into banks
amid fed cut rate expectations.
Brian let's kick this off with you volatility.
It stayed stubbornly low.
What do you make of that environment right now.
Yeah we saw the VIX and volatility
really kind of pop and traded up to 26.
And now we're sitting back down towards
sort of mean average levels for the VIX.
It's kind of interesting because you're seeing a lot of
volatility in those growth kind of names.
It kind of led the charge to the downside.
Uh Bitcoin that is to the downside.
And then it seems like a lot of these other growth names,
we've gotten some earnings reports
recently that have sort of
raised the level of volatility in the growth.
But when you look at VIX you know here on
this chart it's really come down pretty hard.
And I think you know
Mike and I are used to it as options traders.
When we see sort of correlations start to come
down meaning like certain areas
of the market doing very well,
other parts not doing so well.
The S&P or the Nasdaq as
a whole starts to get wishy washy and
sidetracked sideways as things kind of
shake out and you see this rotation occur.
So this is probably why you're
seeing the VIX at such a low level,
despite some areas of
the market having some levels of volatility in it.
Right. And Mike meanwhile though we're
seeing capital rotate into financials.
What do you think is driving the move there.
Well I think a little bit
of that is certainly going to be
some of the great expectation things, you know.
Um, you know, I think a lot of folks,
when they think about because I often will hear,
uh, folks comment about,
oh, improve housing affordability,
we'd like to see rates come down and then
they start talking about fed rate cuts,
as if a rate cut at
the short end necessarily
is going to drive mortgage rates,
which are largely propelled by
the ten year on the long end.
And actually, what we've seen in the most recent cuts
is actually that the yield curve has steepened.
And one of the things we know about
a steeper yield curve is that what do banks do.
They borrow short lend
long steeper yield curves are
typically better for financials.
And unsurprisingly we've seen them
do reasonably well on the back of all of this.
So, uh, and also
I would just add to Brian's point, you know,
one of the reasons that on a day like today,
you saw that the Nasdaq at one point
was down more than 200 basis points,
and the S&P was certainly
outperforming the Nasdaq is because
of that rotation that he's talking about that
we've seen it was the really high beta,
sort of high risk stocks that came
off hard off at the beginning of October,
and that sort of move out of the really high beta stocks.
You know, I'm talking now about
the hims and hers, the palantir,
things like that, in addition to the crypto trade,
because those aren't necessarily
crypto trades themselves.
You know, that has now sort of extended into, you know,
bigger names that aren't
necessarily part of that, like hood.
Uh, that's the name we own.
Broadcom. Obviously the results
weren't all that well received today.
Uh, and I think that seeing it broaden out though
and seeing that the volatility
in the S&P isn't that great.
That's a net positive and
sort of gives me some comfort going into the new year.
Mhm. Well Brian and Mike let's
debate this for a moment here Brian.
Is this shift into banks a tactical trade.
Is it a timing of the rotation or do you
think it's something that's more
sustainable for the long term.
Yeah, I mean this shift has been pretty dramatic.
If you look at the charts just in the last
couple of days, the Xlf,
which represents financials Versus, you know,
something like the Nasdaq
really outperforming the last few days.
And I think the trigger to
Mike's point is this yield curve shift, right.
The two year ten year when
we've seen the fed now cut rates here in
December probably going to get another cut in 26.
And if the back end of the curve kind of
hangs in there and steepens out,
that's probably going to be very good for financials.
I think that's what people are expecting here.
And that's why you're seeing sort of
the run in financials.
We've kind of made a little bit of shift ourselves
to sort of add just a little touch
of financials into our sort of portfolio of stocks.
We'd been a little bit maybe
underweight that more kind of techie.
And I think we're we're we're
feeling like that shift is real.
And that probably kind of continues here.
Yeah. Well Mike, here's a question though.
You have fed policies a tailwind versus
earnings strength and true fundamentals right.
So is your investment thesis
only because rates are coming down.
Shouldn't there be more fundamentals behind that.
Well I think there are more fundamentals.
I mean financials uh, you know,
they're not expensive relative to the market.
They're actually cheap relative to the market.
Now, I would add a caveat that is generally true.
You know, you look at a name like JP Morgan,
and this is not a name that you typically see trading 24,
25 times forward earnings.
This is the kind of name that's typically in
better times probably trading 1516 times.
But you know, if you're an investor and you're sort of
looking at the backdrop for,
you know, the rate picture and how that's going
to impact in, in this case,
the money center banks,
you have to say, okay, well,
I'm actually comforted buying it at
these multiples because I think
they're going to have the wind at their backs.
So, you know, you're getting
it at a cheaper turn to the market.
Some of these other stocks maybe not terribly cheap.
And then there's another question which is,
can the rate of growth in
the highest flying sections of the market continue?
Um, if everybody expects Nvidia
to be the most profitable company next year,
but are they expecting it to then turn around and deliver
5,060% EPs adjusted EPs growth in full year 2027.
I think sort of people are starting to moderate
their exposure there because
they're moderating their expectations.
Yeah. And of course, it's the end of the year.
Can't believe we're saying that already.
So let's talk about 401 K and asset allocation,
something that's perhaps only looked
at once a year or at the end of the year.
And for that we turn to Chris Krueger,
president of Standard of Care,
who specializes within the retirement space.
Chris. It's great to have you with us.
Welcome to Trade Talks.
Uh, there's been a lot of talk
about mismatches in retirement planning.
What's the disconnect that you're seeing?
Yeah. Hey, Jill, that's a great question.
Uh, our users and software see two big disconnects,
often under looking under the hood of A41K plan.
Uh, first, usually investors risk
tolerance doesn't match their asset allocation.
Uh, our users will meet participants
in retirement plans that, uh,
potentially say they're conservative but have
95% exposure to equities.
Or maybe they want more growth and they're
sitting in a cash fund.
They're not doing it intentionally.
It's usually just a set and forget approach.
Or they may have multiple different old
for one or IRAs or other investments.
When combined in view,
we find that they're not commonly working
together towards that person's risk tolerance.
Uh, the other thing is,
as life and careers changes happen, uh,
you shouldn't be what you were at 25 when you're 45.
Job changes and income growth,
these checkpoints, uh, prompt updates.
And most people only look at their 4K once a year.
In fact, they never asked,
does this fit where I should be today?
Yeah. And that's a good point that you
make because we're always
taught set it and forget
it, especially when you're younger.
It'll pay off over time.
So Chris, are people looking at the S&P 500 and
just seeing it go up over a 30 year time horizon?
Um, are they just perhaps too
complacent about owning a target dated fund?
Yes, there's definitely a comfort factor.
Target date funds are easy money cases.
They're appropriate. But, uh,
a couple of important challenges often get overlooked.
Target dates have become the default fund
in most foreign K plans.
And because they're the default,
most people assume that it means they're
automatically on the right strategy for retirement.
And sometimes that can kind of
create a false sense of security.
But like any investment,
a target date fund needs to
be aligned with your risk tolerance,
your goals, even your contribution rate.
If you're saving what you're saving into the plan
and the glide path can't do it all the work for you.
Uh, then there's another layer of complexity.
Target dates have a 2 or 3 retirement plan.
Glide. Glide path.
Uh, that means how much equity exposure
you have towards retirement.
Um, most participants have no idea how these work
and how to utilize them to retire successfully.
It's important that fiduciaries of
retirement plans also understand
how their default fund works,
and to educate plan participants on that.
Yeah. And Chris, there's been big demand this year with
retail investors and advisors to get
involved in the alternative space.
Could you own liquid alternatives in a 401 plan?
Is it even worth it to do that?
Short answer is yeah,
but there's a bigger challenge that most fiduciaries
aren't using these or making them available.
Uh, not because they don't necessarily want to,
but they don't fully understand how to fit
those into their plan investment menus.
There's also an education component.
Once you add an alternative strategy
to a plan investment menu,
you now take on the responsibility of helping
participants understand what these are,
how they should be used inside of asset allocation.
Uh, from an investment standpoint,
alternatives can be a terrific diversifier.
In fact, over the past 15 years,
the rise of liquid alternatives have given
everyday investors access to these strategies,
which historically were only institutional,
um, but used appropriately,
they can help reduce volatility,
smooth out your ride, uh,
and make them more resilient
portfolio so alternatives have a potential role in
retirement plans but something fiduciaries
and their advisors should help them figure out.
All right Chris, we appreciate the insight.
Thanks so much for joining us, Brian.
Speaking of alternatives,
what do alternatives look like for
retirement portfolio that needs
more than just passive exposure?
Yeah, I mean Chris brings up a good point.
I mean, liquid alternatives own a place in any sort
of investment management risk portfolio.
I think, you know the old 60 over 40 traditional stocks
and bonds or index passive funds.
You just set it and forget it like you guys talked about.
I think there belongs someplace
of liquid alternatives. How you do that.
Well, in some 401 plans you can have them self-directed.
And from there you can kind of
educate yourself and add certain,
you know, long short strategies, macro trend strategies,
CTA programs that are offered actually in
fund format or even,
you know, something we do where we're
long equities, we're long volatility.
So some sort of hedged equity product.
Those are the kind of things I would look to
sort of add as a small sleeve,
call it 10 or 20% in A41K plan.
But you know, if it's not
self-directed, I highly suggest,
just like Chris said, reach out to
your investment advisor. Get educated.
Whoever is heading up
the fiduciary responsibility that 41K plan to educate,
what funds can we add to that sleeve so
that it's just not all about set it and forget it,
and just hope the S&P has 30 years of of progress.
Because look, I mean,
you've seen what happened in Japan.
They had years of nothingness, right?
We had ten year horizons
before in the past where we've had
these volatility events and then
stock market does nothing.
You don't really want to be caught up in that.
And to get educated about
different avenues is very important.
All right. Great advice.
As always. Mike, I want to
wrap this up and go back to tech for
a moment here and the market's reaction quick read on it.
Oracle reported Broadcom just
reported what are you seeing in the numbers.
What are investors questioning here.
Yeah. And it's interesting because
we had exposure to all of these names.
We were actually short Oracle going into earnings.
We were long Broadcom
um you know both actually have sold off.
We can we can see that the
Oracle situation I view that very very differently.
Um you know and one of the things it's something that
Warren Buffett often said and
it's certainly something that I hold dear,
which is that when I'm
evaluating a company's performance,
I kind of feel like the balance sheet is,
you know, the window of truth on,
on a On a business affairs.
And in the case of Oracle,
we understand the investments
that they're trying to make.
But it's adding a heck of a lot of debt.
I mean, they've got about $100 billion
worth of debt right now.
And if that turns out to
be a little bit too much exposure,
an investment to this space,
they are more exposed than most.
And we do see a little of the blue bloom
coming off the AI rose here a little bit.
Now in Broadcom's case I remain bullish.
We continue to hold the stock. We haven't sold it.
I do wish we'd had tighter hedges
going into the print, to be honest.
But um, you know, I think that look,
their partnership with alphabet on the TPU side,
I think is strong.
And I do think that people who have
exposure to Nvidia and look,
anybody who's involved in the S&P has exposure to Nvidia.
They should actually be looking
to broaden that trade out a little bit.
We've actually cut our position in Nvidia completely.
All right. Appreciate your insights.
As always thanks for joining us on trade talks I'm
Joe Malandrino global markets reporter at Nasdaq.