Animal Spirits Podcast - Talk Your Book: Investing in a Concentrated Stock Market

Starting point is 00:00:00 Today's Animal Spirits Talk Your book is brought to you by State Street. Go to statestreet.com slash investment management to learn about the original ETF, SPY at state street.com backslash investment management to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Redhol's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

Starting point is 00:00:37 Clients of Bridholz wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. Man, it's crazy. I remember in 1993 when SPY was launched like it was yesterday. You know what I mean? I feel like time is moving so fast, Ben. I actually, I saw the original ETF in the theater. You know what, my Canadian brethren always remind me that Spy was the original U.S. Yeah, there was actually an ETF in Canada that came up before this. They didn't know that. No, that's good Intel. But yeah, this is, this is, this is, this is, this is, this is, SPI as a brand.

Starting point is 00:01:15 And there's so much to talk about with the stock market these days. And it's because of the concentration and AI and the other 493 versus the Meg 7. So we ended all that with returning guests, probably one of our, I think one of our guests who's returned the most on the show probably. he's been on, I don't know, six or seven times. Now, Matt Bartolini is a managing director. One of our favorites. Yeah, he's the managing director at State Treat Global Advisors, head of Spider America's research.

Starting point is 00:01:42 We've talked to him a bunch. He's great. So here is our talk with Matt Bartolini. Matt, how are you? Good to see you, my bald brother. Yeah, good to see you too. The follically challenged. All right.

Starting point is 00:01:58 Yesterday, I was talking with Josh, and I shared a chart, and on the top pane of the chart showed the MagS, divided by the S&P 493, and that ratio is breaking down. Simultaneously, I showed on the bottom pane, the Russell 2000 versus the S&P, and that is breaking out. It's a really interesting market

Starting point is 00:02:19 that we're living in on, we're recordings on January 21st. And I said to Josh, is this bearish or bullish? And I think we both thought the latter that the 493 taking the baton is, like, listen, And if the Mag 7 crashes, like I think we're all in trouble, obviously, given the concentration, which we'll talk about.

Starting point is 00:02:38 But let's just say, like, absent a mag 7 meltdown, the 493 looking better, is that a bad thing or is that a good thing? What do we think? So I think it's bullish for the economy, right? So it sort of signifies that the sort of market returns are broadening out and that it's not going to be so concentrated, even though we still have rampant concentration. I think one of the more instructive things, probably within that chart, which I can sort of visually think, about is that breakout of small caps. And that breakout of small caps really is coincided with monetary and fiscal policy impulses benefiting them. So whether it is lower rates, you know, lessening the cost of money, small caps tend to be highly indebted, or the one big beautiful

Starting point is 00:03:19 bill act and the changes to expense reductions that take place, R&D expensing, and just the benefit to the consumer. And if you're more consumer-oriented, which small caps are, that can be beneficial. And we've seen earnings be revised to the upside for small caps, same with large-caps, but small caps now have double-digit earnings growth forecasted for 2026. And since the end of July, which we started to see the Fed signal more accommodative monetary policy, cut rates as well, that fiscal impulse of the legislation, small caps, above perform large caps by 13%. So you start to see that breakout. So I'd say that's bullish for the broader economy where you're not just having seven, six stocks driving all of the market action. Do you guys have to update your definitions of small, mid, and large?

Starting point is 00:04:06 How often do you have to sort of update that? Because it has to be a moving target, obviously, right? Yeah, it's sort of theoretical to some degree. It's, you know, whatever benchmark you want to use is the Russell 2000s, the S&P 600, what is the actual band that you do have within that small and mid-cap space? If you have, you know, in the S&P 400, which is mid-cap, the 401st security, you know, I don't know what it is, we can say the average market cap, capitalization, say it's $15 billion.

Starting point is 00:04:33 Well, just because of the numerical math of Ewing can have 400 stocks, it gets bumped down to small caps. And it's actually its market capitalization, maybe under a Russell definition, would be in the large gap, or it would be under crisp definition in the small caps. And so, like, when we have these discussions, we think about having similar benchmarks

Starting point is 00:04:51 to decompose your cap structures, so you have no gaps in overlap. So, you know, S&P 500, so a spy, then if you're using the Russell 2000, what have you done? mathematically, you've cut out the middle. So if you want midcaps, you could probably have the 400. So, yeah, the definitions keep changing because they have those more fixed bands.

Starting point is 00:05:10 I asked Ben on Animal Spirits this week. We're talking about the market in between our movie conversations. And so I think the current backdrop coming into the year, it's hard to argue that the economic financial conditions are anything but accommodative. we have inflation for the most part going in the right direction. You have rates commensurately coming down. You have the AI, CAPEX, spend, the tailwinds there. The economy is doing fine. There's no credit delinquencies. Like, things are good. And then on the other hand, you say, yeah, but like everybody knows it's good. The market's been pretty good. Was it three,

Starting point is 00:05:56 we had two 20% up years and then a set up 17%? You're like, like the, the, The equity gains a bit commensurately good. So I think when people start talking about, on the one hand and the other hand, I think we could outthink ourselves and try and get a little bit too cute. Like, oh, everyone knows that everything is good and therefore, like, I should maybe go the other way. I don't know. Maybe sometimes that works. But by and large, is that how you see it?

Starting point is 00:06:17 Like the conditions for continued stock market appreciation, which with the obvious caveats that who knows what is going to happen with the future, whether it's the tariffs or anything, else that comes out of nowhere. Like absent that aside, it's never going to be a straight line up. But generally speaking, like, we're in a pretty goldilocks sort of environment. Did I just say the G word? But we are. Yeah.

Starting point is 00:06:42 I mean, I think you always have to think of like what the catalyst might be, which is always really hard to forecast. And I think that's why it's the game of markets. And when we look at it, so growth on balance is improving, right? So if you look at the GDP now print from a couple weeks ago is over 5%. We're not going to be at that level. but growth on balance on an aggregate basis across the globe continues to ring positively. The same token, monetary policies over the last 18 months have been more accommodative than not.

Starting point is 00:07:10 So you've seen rate cuts from major central banks. Many of them are probably on hold for the next foreseeable future over the next year, but those rate cuts still have to make their way into the economy. So the sort of cost of money is getting cheaper. If you look at money supply around the globe, it is moving higher. So there's more liquidity in the marketplace. That is beneficial. I think there are, that doesn't mean there aren't risk. I do think there's an inflation upside bias risks due to some of these policies where you might be overheating, but you don't have this catalyst to sort of pop any excitement just yet because even though markets are up double digits and massive concentration, this is not

Starting point is 00:07:47 the dot-com era where you have these market returns, but earnings are declining. Earnings are growing. You see really strong earnings growth from the U.S. on a global basis as well. Emerging markets are forecast that. have higher earnings per share growth in 2026 than U.S. equities. So on balance, the market environment appears quite healthy, which despite all of the headlines, right? So you're talking about movies, right? One battle after another. This is like one headline after another to impact sentiment. To impact sentiment. It's so hard. You get all these questions. Oh, should I be concerned

Starting point is 00:08:19 about this? I saw like, we're going to take over this country, or we went into this country, or doesn't this look like the movie Sicario? And you start to think about it and you're like, it's fine. Assets over time outperform cash holding assets is a good thing. Being diversified is even a better thing. So we asked you in the past about the flows. So we're starting to see like Michael said, the 493 kick up a little bit. Small caps maybe making some noise internationally and emerging market stocks had a good year last year. Is any of that showing up in the flows yet or is all the money still going into large cap U.S. stocks? So the majority of it's still going into U.S. large gap. That's a big market. So last year, I think it was something to the effect of 74% of all flows into equity ETFs in the U.S. listed went into U.S. equity exposures like a spy, for example.

Starting point is 00:09:08 Is that higher than normal or is that about what it is? So that's a thing. That's high. That number sounds big and it is big, but it's below what their market share would indicate. So their market, U.S. equity ETFs, market share of equity. equity ETFs is 80%. So on a relative basis, while that money is huge, it is less

Starting point is 00:09:26 than their market share would indicate, and it's far less than when we saw in 2024 where they took in 86%. So there is a broadening of geographical diversification where you see it going into those developed markets, into emerging markets, and to some extent, it makes sense. If you look at last year's

Starting point is 00:09:42 return patterns, and you look at all the non-US equity markets and the MSCI Ake, 76% of them beat the U.S. That's the largest hit rate since 2009, and the average excess return was also the largest since 2009, and it coincides with this reworking of the macroeconomic paradigm, which is supporting broader regional diversification away from the winning this trade over the last 15 years of U.S. equities. I'm sure you get this question all the time, spy being the OG of S&P 500 ETFs.

Starting point is 00:10:17 The concentration persistence, I think people wonder, like, well, what happens if it stops working? What happens if it like worse than stops working? What happens if it unravels? You can't talk about these companies without looking at the fundamentals. It's like, oh, they're 35% of the index. Okay. What about the percent of the earnings? I mean, I know the market cap percentage is higher, but it's not like it's 35 and the earnings are only 9%.

Starting point is 00:10:47 right? Like the gap is not that large. Is that a concern from your end or is this what a normal, healthy, functional market looks like? And we've been discussing this. This is not a new phenomenon. I think Fangs were coined in 2017. It's been almost a decade we're having the same conversation. Yeah. So I think concentration has always been in the markets to some degree, even if you look at non-U.S. markets. So, you know, Spain, very concentrated at the top. South Korea, very concentrated at the top. obviously different countries. The U.S. is far bigger than those two. So market concentration is not a new phenomenon.

Starting point is 00:11:21 And here in the U.S., we've had concentrated markets well before. I think right now in terms of like, is this a concern? Well, again, these firms are big for a reason. They sell a lot of goods and wares, and they're at the forefront of the AI productivity miracle. I mean, myself, I've probably interacted with four of the companies and their devices and services probably within the last hour, just because, you know, I have an iPhone. I have a Gmail account.

Starting point is 00:11:42 Like, those are those things that I'm just ingrained with. with, you know, I think we renewed our Netflix subscription. Like, these are just things people do on a day-over-day basis. I don't think I'm that unique from that perspective. I think one of the things that's hard, though, is are these always going to be the same top seven, top 10, whatever companies? And I think that's where that is a hard thing to forecast, but it's probably likely that they're not going to be the same because history often repeats itself, where, you know,

Starting point is 00:12:10 if you look back over the last 15 years, at one point Exxon was the world's biggest. It would be hard to fathom at that point that Exxon, that Exxon, could no longer be the biggest company in the world because look how much oil is coming out of the ground. Or GE or IBM, if you went and asked my parents or my grandparents if they were still alive, like, GE is no longer the largest company in the S&P 500, they'd be like, what happened?

Starting point is 00:12:31 And I think that's the same sort of cultural resonance, the connection is made to football, right? Football is the most popular sport in America right now. But he went back to the 1950s and told people that horse racing and boxing was no longer that important. it would break their brain. And right now it's the same thing.

Starting point is 00:12:47 Like something's going to have to happen where those companies are no longer as big as they are now. And it's likely regulatory, antitrust, you know, are all their AI capabilities just going to be unloaded into their goods and services so you don't have a choice? Or does AI become too commoditized? So like concentration is not a problem,

Starting point is 00:13:07 but it's going to change over time, but you should still maintain investment into broad assets. You have this interesting piece on concentration. and you're looking at it from a dividend yield perspective. And I know people have used that as a valuation framework, like in the dot-com bubble. Like the dividend yield got solo. People said, this is showing stocks that were valued.

Starting point is 00:13:26 And if you use that framework today, it doesn't work as well. And you make the point that a lot of it is changes in sectors. So you said, and you looked at in 1990, energy and industrials and consumer staples made up, it looks like almost 45% of the total. And today, I think that number is probably more like, I don't know, 25% or 20% for those. energy is down to like 3% of the total. And you're saying those are higher yielding segments of the market. And utilities is, I don't know, only 2% of the market.

Starting point is 00:13:50 It's a much smaller allocation for these sectors, not just stocks, but sectors that don't comprise as big of a weight. And the ones that are more concentrated, they're doing buybacks. So you can't really look at dividend yield as this valuation framework anymore because you're still getting that same kind of thing through buybacks. It's just you don't see it in the form of a yield. Yeah. dividend yield is really not a great metric to utilize for valuation anymore because a lot of these companies don't pay dividends. And the biggest companies where their contribution to the dividend, they don't pay either a sizable dividend or don't pay any dividends at all. And this idea of owning equities for income as an income producing asset is gone.

Starting point is 00:14:33 Like, they're not income producing assets. They generate negative real income. If you look at the dividend yield on the S&P 500, it's 1.1.1.000. 2% I think today. It's well below the rate of inflation, well below the rate of cash. Wait, has it ever gone under 1% for it? Probably not, right? No, the lowest is like 1.08, I think.

Starting point is 00:14:53 So we're like... So if that happens, people are going to make a big deal about it, probably. But that was in what? The dot-com bubble? Yeah, I have the... I do have the chart up because it was obviously something he wrote up. 1.1. Man, that is really... It's so low. It's extremely low.

Starting point is 00:15:08 And like, the contribution of returns from income, it's extremely low, too. Yeah. But to your point, you show the chart in here of, yeah, the dividends by sector, but then you show buybacks. And that is increasing. And that gives you a similar effect to dividends. And by, oh, by the way, it's more tax-efficient for investors, too. Yeah, and that's why whether the sector make up changes where these low income producing sectors all of a sudden are no longer the biggest, like tech communication services, it's not going to change because the way companies are returning shareholder value is massively changed. That's why shareholder yield is so important. That's probably a far better metric for assessing valuations than dividend yield because it assumes buybacks. But there's been massive shift of doing buybacks more than paying dividends by companies. And that has reduced the amount of income generated. available to common U.S. equities, which means for income-oriented investors, which they're only getting more of them as the demographics shift and skew older, they're going to need to find different sources of income. And in order to do that, you're going to have to modify your asset allocation mix and maybe take on some biases towards credit, towards value stocks, right, dividend equities or

Starting point is 00:16:18 value stocks, or using some sort of asymmetric type return profile, derivative income, things like that. You're going to do something differently. You can't. interest own the S&P 500 for income. You guys, I mean, I know you remember how often this would come up not just in financial circles, but like in the Venn diagram of politics and investing, the buyback issue. Yeah. And how it was just used to goose earnings or offset share issuance or whatever. I'm very happy that we don't have to have that tired debate anymore.

Starting point is 00:16:56 there's no question here. Do you guys remember that? Yeah. Like, why did that, why did that die? Is this the Chris Farley show? Yeah, yeah, remember that? That was cool. Do you remember when you were in wings?

Starting point is 00:17:06 That was cool. But why do you guys think that died? I mean, that kind of did it. It was just so pointless, but... I just think it became... It became just super tired. It's like this idea of like active versus passive, which I know I just wrote an article about that,

Starting point is 00:17:17 but took it more of a lens of, like, buying behavior and preference. But this idea of like, active is better, passive is better. And it sort of became like, you know, people just use what they would like to use, in portfolios based on their outcomes and preferences, and that's kind of how it works.

Starting point is 00:17:29 Like, yeah, of course, one might be better than the other. But at some point, there's only so much juice you can get out of a certain debate. And I think the shareholder buyback one, it started to just lose its luster because ultimately, like, it wasn't that big of a risk. It wasn't that big of an issue. What do you think is the modern-day version of it? I kind of feel like...

Starting point is 00:17:48 I feel the concentration is. Like... Concentration? Yeah, that's true. But if you done any work, if you look at the shareholder yield to historical... If you include the dividend yield plus the share buybacks, it's probably pretty similar, isn't it? It can't be that far off from historical norms.

Starting point is 00:18:03 I haven't looked at it in a while. We did this one big study, because I remember when there was a big fervor on it, of like someone said something about company, stock volatility is exacerbated during the buyback blackout window. Because companies weren't buying back their stocks, and that was a result of all this volatility, which we disproved by looking at this analysis going back,

Starting point is 00:18:24 you know, like the 1990 or something. So that debate was still there, but to answer your question, not going on that tangent, but it's probably similar because these companies aren't massively increasing their buybacks. If anything, I don't even see that many headlines now of like, you know, Apple approves a $100 billion buyback. And that's the other thing, too. There's like a signaling effect to it. They might have said they'll do $100 billion, but no one ever goes back and checks. I mean, some do. Some do.

Starting point is 00:18:50 But like the broad media who maybe writes that article, they never go back and go, you know, Apple only. did, 80 billion. That doesn't seem like it's a good idea. Let me offer a, I think this is a contrarian take. In fact, it definitely is. I'm not naive to history, not to brag. I've read many books. I think it could be possible, it could possibly be different this time with the top 10 stocks. And in fact, it has been recently. Like, we're seeing a slowdown in terms of turnover at the top 10. And I think the main difference, there's a few main differences between general electric and IBM and AT&T and Exxon and Johnson Johnson, whatever, versus the ones today. How often back in the day did people interact with General Electric?

Starting point is 00:19:38 I know there was appliances and credit and all that sort of stuff, but like these products are so ingrained, not like in society and our every single day life. And the monopoly and the moat and the margin stability and expansion in many cases. It really truly is, and this is not an opinion. It is unlike anything we have ever seen before. And I know that it was difficult to foresee what could displace IBM in the 60s and 70s. Like nobody could have foreseen Microsoft, but also like just the the size of these companies and what they're doing to the startup community where like there is only, there was only a size

Starting point is 00:20:22 so big that these companies can get before like they're just bought up and gobble. up by Google. These are venture companies in many cases. And so, like, yes, Anthropic is out there, an open AI, and maybe those are the next things. And who knows? Obviously, I'm not like an idiot. I'm not going to pound the table and say that Apple will never be outside of the top ten. I'm not saying that.

Starting point is 00:20:41 But I think that there is a real argument that we're still having the same conversation 10 years from now about Google and Amazon and Microsoft and Apple. Yeah. I mean, look, if I were to place odds on it, you know, two to one chance maybe, right, that something happens. It's hard to fathom that what is currently a reality will obviously change in the future, particularly for these very big, well-known companies. But, like, GE is kind of as interesting analog, right?

Starting point is 00:21:06 What did they own? They owned NBC Universal. They were making movies and TV shows. They made dishwashers and refrigerators. They're also big into hydro power plants as well as jet engines. Like, they had their hands in many pots and started to divert away from their sort of core businesses. I don't think, obviously, that's the case right now. But, you know, and look, Amazon's doing really well at making movies.

Starting point is 00:21:25 Right? And same with Apple. They have some good TVs and movie shows. But at some point, like, are you just getting too big where you move away from your core services? I'm not saying any of them are now. But I think those are those signposts. And again, like, not that this was a big risk, but one of those signposts a little bit was when they tapped the debt markets for the first time to fund some of their AI initiatives. It's like, oh, hmm, that's interesting. I'm going to kind of fly. I'm going to store that away. I'm going to flag that. Not a big risk, but that's interesting. They usually don't do that. So it's hard to forecast the future. is the big takeaway. And, you know, I was asked this question of like, well, isn't, you know, spy, if you just own spy, you own AI. Like all these, like, isn't that just a way to get AI exposure? And it's like, well, you could do worse. What's the central dominant market, macroeconomic market theme right now? It's AI. If you were going back to the early 1900s, it's railroads and in oil companies.

Starting point is 00:22:18 That was at the top. So it's sort of a sign of the times. And it's not a bad thing you're buying this AI. these massive AI companies because they're making a lot of money. Like if they weren't, if it was the dot-com era where earnings were declining, that's that risk. Their earnings contribution. Spine Schell has been the best strategy for the last 15 years. Like, I can't even imagine what somebody would have had to do to outperform.

Starting point is 00:22:43 Even last year, like I think we's not a record number of stocks not beating the market. By the way, like this, I guess the active passive debate is a very tiresome one. But it's no mystery why Active has had a tough. time. If you look under the hood, most stocks have not beaten the benchmark gains have been concentrated in the biggest stocks and the biggest winners. It's no great mystery. And whether AI fizzles out and whatever and there's something else like, you're going to ride the ups and downs of innovation and you're going to get capitalism. That's spy. Yeah. And if we look at the returns last year, and it's just one year, but these are instructive of prior years too, and the numbers will move around.

Starting point is 00:23:23 but in spies category, U.S. large cap blend, only 31% of managers were able to beat their benchmark. The average excess return was minus 200 basis points. Oh, brutal. So, like, looking at the win-loss record, like, that's not a great record. I'm like, oh, okay, well, I'll just own, I'll just own spy.

Starting point is 00:23:40 Like, I don't want to have to make that excess return choice. I want to own the asset. I want to own the asset. I hope this is the year. Man, I hope this is the year that, like, I hope last year was the bottom. And that's not even bad for Spy. Like, in fact,

Starting point is 00:23:51 just let the 493 have their day in the sun. And like, it is such an interesting market. Like, I think a lot of the AI trade is being rejected right now. And it's not, and the market's doing just fine. Like Oracle is getting really beat up. Like new 52 week lows today. Microsoft is breaking down. And I guess that's probably the closest proxy to the AI trade, Nvidia, obviously, too.

Starting point is 00:24:17 But like, investors are today rejecting, rejecting the. hype and they're buying other things. And I think like, I think it's a, it's a breath of fresh share. I think I, you know, not I think. I do. I love it. I think it's wonderful. So it's, it's great to see a broadening of market leadership. And I think the small cap trade is probably the most instructive of that. But I also think grouping, I think we love to categorize things in this world. Guilty. Yeah. I mean, everything has to have its nice little neat box. And mag seven is obviously a great name, fangs. These are great. monikers. But like even classify them all as one like homogeneous group is not really fair either

Starting point is 00:24:58 because their growth trends are completely at odds with each other. Like Navidia is forecasted that have 69% earnings per share growth. Microsoft is at 22% Google's at 20%. Meta's at 2%. Right? They're all over the place. Now they're growing, but they're not growing at the same pace. And I think that speaks to like this whole idea of concentrations that ultimately they're going to move around a bit, right? We're going to start to see them shift and move. You're going to see other companies come in. You mentioned Anthropic or SpaceX. What if they IPO? Like, that's going to, not going to say they're going to be the world's biggest company, but like that's a new entrant to the marketplace. The market changes. It's not just a new entrant. It's a monster potential entrant.

Starting point is 00:25:39 And like, this is like a big Josh thing more than me, but I do believe that investors, if they're going to do a whatever the number, $200 billion IPO, like I don't know how much money they're going to raise, investors will sell other things to fund that purchase. Like, they just have to. Yeah. I mean, look at overnight, right? So Netflix, the day before we were recording this, they came out with earnings and they great earnings.

Starting point is 00:26:01 Everything was fine. They were going to buy Warner Brothers and they guided lower. You know, the last time a company that was well known on the internet went out and bought Time Warner. It was the death knell for them, right? I'm not saying the Netflix is going to do that. I love their shows. I love their algorithm.

Starting point is 00:26:18 Feeds me all the great. stuff. But like, this is that largesse. Like, you get big, you get bigger and get bigger. I know you guys are sports fans. It's the disease of more. You know, Pat Riley coined it after you win a championship. You just want more and more and more and more. And that's a big risk for companies when you get that big. And so far that is that is that is like in my mind just like the easiest and most obvious yellow sign for these companies. Like that book scale, I forget who authored it. But like Jeffrey West. There is just a limit. to how big buildings, organisms, companies can get before they just buckle.

Starting point is 00:26:54 And can the market, can the world, can these people running it support a $10 trillion company? I don't know. I don't know if it can. Well, I guess, and I think the other thing is that the best thing would be for the Russell 2000 or the $493 or whatever, everyone else, is that these tech companies are the ones who are putting all the money up. So they're going to have to see a return eventually.

Starting point is 00:27:15 And maybe these other companies benefit from all the technology, infrastructure that they're building out. And they don't have to put the money up front like these. So these tech firms have become like industrials in some ways and the fact that they're having way more outlays now than they had to in the past. They've been able to pay for it out of their cash flows. But it seems like unless they start getting a return on the investment,

Starting point is 00:27:32 it's not always going to work like that. So they've changed their whole way of doing things to build out AI and all the data centers. And that's the risk. But the other way, to your point, Michael, if they are entrenched, then it's because they're the ones who are doing this and no one else is. Well, I think that's one of the interesting things about the whole AI

Starting point is 00:27:48 trade is their cap X is going to these infrastructure ecosystem builds where if you look at last year, you know, very cyclically oriented market, upside growth bias, again, inflation moving around, but it's generally moving in a direction closer to the Fed's preferred threshold than away from it. And you look at some of the more defensive areas of the marketplace like consumer staples. Consumer staples is up 1%. It's a defensive type of marketplace. What's the other sort of traditional defensive that works well in recessionary and slowdown periods. Utilities. Utilities were up 13% last year. Utilities, ETFs in their flow patterns. They had the, I think, the second most flows out of any other sector behind tech because the investment is going there.

Starting point is 00:28:30 It's that sort of first source of investment where they're getting all that cap X and they're not having to prove any monetization of it, right? The electricity demand. And that's another thing. All this electricity demand for AI, that could prove to be inflationary. It's just an insanely interesting market dynamic of how this AI will play out, who the winners and losers are. And I think picking that now so early in the game is going to be really hard. There's a really hard bet. Matt, last question for me. If we could fast forward to December and you got to know one thing about how this year went

Starting point is 00:29:04 where you could be like, all right, it was a good year, it was a bad year for the market. What piece of data? I don't know this is impossible exercise, but hey, I asked the question. What piece of data? What piece of data would you want? Where the Fed Funds rate is, because that would tell me a lot about fiscal policy and their ability to influence monetary policy. And it would also tell me how that would actually manifest itself in growth and inflation dynamics.

Starting point is 00:29:28 Because if we end up at like a two handle, that's a big change. If we're at where we are at right now, that means we're sort of staying the course. It's not too hot, not too cold. You can probably ebb and flow. So that will tell me if we have to be. have a risk of upending the apple cart of the good times that we've been on. Let me just follow. I have one follow up to that.

Starting point is 00:29:51 Wait, Michael, what's your answer to that question? Do you have one? I would have said earnings. Okay. But, I mean, Fed funds is definitely like a top three for sure. It always is. If we got into the twos, would that be, like, alarming? Like, wait, why is it so low?

Starting point is 00:30:06 Or would you say, like, oh, it's super accommodative? I'm curious what your take would be on that. I would say it's, so it's hard for me. me to say, I'm not an economist, but if you're asking me what you are, I think it would be too low. I think that would be hard. If we look at the output gap, right, the output gap of actual GDP to potential GDP, it's quite positive now. And typically the Fed doesn't ease into a positive output gap. So something is off-kilter. So maybe the labor market is weakened significantly as a result of AI demand replacing jobs. But like, is that a risk to the economy with lesser jobs if growth is

Starting point is 00:30:41 really high. So it's that K-shaped economy. So you want to rethink your answer? I'm really teasing. No, but I'm teasing. But this goes to my point. Like, is if the Fed is at two, like, is that bullish because things are so bad that they're being stimulative? Or is it just bearish because what happened? I just would want to know how we got the like in the twos. I think that would be the biggest struggle for me because it would be concerning that it would lead to more inflation. upside. And that becomes like a bigger risk. And around and around we go. Okay. Matt, this is awesome as always. For people that want to learn more about SPI, not that you need any introduction, where do we send them? So you can go to state street.com backslash investment management. Okay. Thanks as always.

Starting point is 00:31:29 Okay. Thanks to Matt. Thank you to State Street. Remember, check out Statestreet.com backslash investment management to learn more and email us Animal Spirits at a compound news.com.

Animal Spirits Podcast - Talk Your Book: Investing in a Concentrated Stock Market

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