Loading summary
Transcript85 lines
- [00:00]
A
Today's Animal Spirits Talk youk Book is brought to you by State street. Go to statestreet.com investmentmanagement to learn about the original ETF spy@statestreet.com investment management to learn more.
- [00:17]
B
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 Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.
- [00:46]
C
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. Actually, I saw the original ETF in the theater.
- [00:58]
A
You know what? My Canadian brethren always remind me that SPY was the original US et. There was actually an ETF in Canada that came up before this. They didn't know that.
- [01:09]
C
No, that's. It's good intel.
- [01:11]
A
But yeah, this is. This is. This is. Spy is a brand 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 Mag 7. So we ended all that with returning guest. Probably one of our champion. I think one of our. Guess who's returned the most on the show. Probably he's been on, I don't know, six or seven times now. Matt Bartolini.
- [01:36]
C
He's a managing director, one of our favorites.
- [01:38]
A
Yeah, he's the managing director at State Street Global Advisors, head of Spider Americas research. We've talked to him a bunch. He's great. So here is our talk with Matt Vardellini.
- [01:50]
C
Matt, how are you? Good to see you, my bald brother.
- [01:53]
D
Yeah, good to see you too. Follicly challenged.
- [01:58]
C
All right. Yesterday I was talking with Josh and I shared a chart and on the top pane of the chart showed the mag 7 divided by the S&P.493. And that ratio is breaking down simultaneously. I showed on the. On the bottom pane the Russell 2000 versus the S& P. And that is breaking out. It's a really interesting market that we're living in on this. We're recording 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, if the Mag 7 crashes, like I think we're all in trouble obviously given the concentration which we'll talk about. But let's just say like absent, absent a Mag 7 meltdown, the 493 looking better. Is that, is that a bad thing or is that a good thing? What do we think?
- [02:47]
D
So I think it's, it's bullish for the economy. Right. So it sort of signifies that the market returns are broadening out and that'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 has coincided with monetary and fiscal policy impulses benefiting them. So whether it is lower rates, lessening the cost of money, small caps tend to be highly indebted we or the one big beautiful Bill act and the changes to expense reductions that take place, R and D expensing and just the benefit of 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 have outperformed large caps by 13%. So you started 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.
- [04:01]
A
Do you guys have to update your definitions of small, mid and large? How often do you have to sort of update that? Because it has to be a moving target, obviously, right?
- [04:11]
D
Yeah, it's sort of theoretical to some degree. It's whatever benchmark you want to use. Is it the Russell 2000? Is it the S&P 600? What is the actual band that you do have within that small and mid cap space? If you have in the S&P 400 which is mid cap, the 401st security, I don't know what it is. We could say the average market capitalization say it's 15 billion. Well just because of the numerical math of yielding can have 400 stocks, it gets bumped down to small caps and it's actually it's market capitalization. Maybe under a Russell definition would be in the large cap 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 to decompose your cap structures so you have no gaps in overlap. So you know S&P 500. So spy if, then if you're using the Russell 2000, what have you done? Mathematically you've cut out the middle. So if you want mid caps, you could probably add the 400. So yeah, the definitions keep changing because they have those more fixed bans.
- [05:10]
C
I asked Ben on Animal Spirits this week we're talking about the market in between our movie conversations. 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? We had two 20% up years and then a set up 17%. You're like, like the equity gains have been commensurately good. So I think when people start talking like 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? Like the conditions for continued stock market appreciation, which with the obvious caveats that who knows what, 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.
- [06:42]
D
Yeah, 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 gonna be at that level. But growth on balance on an aggregate basis across the globe continues to ring positively. The same token, your monetary policies over the last 18 months have been more accommodative than not. 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 risks. I do think there's an inflation upside bias risk 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 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 US on a global basis as well. Emerging markets are forecasted to have higher earnings per share growth in 2026 than US equities. So on balance, the market environment appears quite healthy, which despite all of the headlines, Right, So you were talking about movies, right? One battle after another. This is like one headline after another. To impact sentiment.
- [08:16]
A
Right?
- [08:17]
D
To impact sentiment. It's so hard. You get all these questions, oh, should I be concerned 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.
- [08:36]
A
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 may be making some noise. International 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 just going into large cap US stocks?
- [08:52]
D
So the majority of it's still going to US Large cap. 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. u.S. Listed went into U.S. equity exposures. Like a spy, for example.
- [09:08]
C
Is that, is that higher than normal or is that about what it is?
- [09:10]
D
So that's. That's. So that's the thing. It's. That's high. That number sounds big and it is big. But it's what their market share would indicate. So their market US equity ETFs. Market share of equity ETFs is 80%. So on a relative basis, while that money is huge, it is less than their market share would indicate, and it's far less than what 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 return patterns and you look at all the non US equity markets in the MSCI AC way, 76% of them beat the US 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 winningest trade over the last 15 years of US equities.
- [10:10]
C
I'm sure you get this question all the time, spy. Being the OG of S&P 500 ETFs, the concentration, persistence. I think people wonder like, well, what happens if it stops working? What happens if it, like, wars and 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, I know the market cap percentage is higher, but it's not like it's 35 and the earnings are only 9%. Right. Like, it's. The gap Is, is not that large. Is that a concern from your end or is this what a normal, healthy function bull market looks like? And we've been discussing this. This is not a new phenomenon. I think fangs were coined in 2017. Like, it's been. It's been almost a decade. We're having the same conversation.
- [11:04]
D
Yeah. So I think concentration has always been in the markets to some degree, even if you look at non US markets. So Spain, very concentrated at the top. South Korea, very concentrated at the top. Obviously different countries. The US is far bigger than those two. So market concentration is not a new phenomenon. And here in the US we've had concentrated markets well before, I think right now, in terms of 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 I have an iPhone, I have a Gmail account. Those are the things that I'm just ingrained with. I think we renewed our Netflix subscription. These are just things people do on a day overday 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 ten, 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 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 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, GE is no longer the largest company in the S&P 500, they'd be like, what happened? And I think that's the same sort of cultural resonance. The connection was made to football, right? Football is the most popular sport in America right now. But if you 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. 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. Are all of 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 concentration's not a problem, but it's going to change over time. But you should still maintain investment into broad assets.
- [13:13]
A
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 so low, people said this is showing stocks were valued. 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%, 20% for those, energy's 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, like 2% of the market. It's a much smaller allocation for these companies. These sectors, not just, 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're, 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.
- [14:12]
D
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. Like it's not, they're not income producing assets, you know, they generate negative real income. If you look at the dividend yield on The S&P 500, it's 1.12%. I think today it's well below the rate of inflation, well below the rate of cash.
- [14:47]
A
So has it ever gone under 1% for it? Probably not. Right?
- [14:50]
D
No, the lowest is like 1.08, I think. So we're like, but we're like.
- [14:55]
A
So if that happens, people are going to make a big deal about it. Probably.
- [14:57]
C
But that was in what, the dot com bubble?
- [14:59]
D
Yeah, I have the, I have, I do have the chart up because it was obviously something one man.
- [15:04]
A
That is really, it's so low.
- [15:06]
D
It's so it's, it's extremely low. And like the contribution of returns from income, it's extremely low too.
- [15:12]
A
Yeah, but to your point that 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 oh by the way, it's more tax efficient for investors too.
- [15:27]
D
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 dividend, than paying dividends by companies. And that has reduced the amount of income generation available to common US 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, dividend equities or 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 just own the S&P 500 for income.
- [16:29]
C
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.
- [16:44]
D
Yeah.
- [16:45]
C
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. There's no question here. Just. Do you guys remember that?
- [17:00]
D
Yeah.
- [17:00]
C
Like why did that, why did that die?
- [17:01]
A
Is this the Chris Farley show?
- [17:02]
D
Yeah, yeah, yeah.
- [17:03]
C
Remember that? That was cool.
- [17:04]
D
Do you remember when you were in Wings?
- [17:06]
C
That was cool. But why do you guys think that died? I mean that kind of did. It was just so pointless.
- [17:10]
D
But I just think it was like a big thing. It became just super tired. It's like this idea of like active versus passive, which I necessarily. I know I just wrote an article about that, 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 then sort of became like, you know what, 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. 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.
- [17:45]
C
What do you think is the modern day version of it? I kind of feel like, I feel.
- [17:48]
D
Like concentration is like concentration.
- [17:51]
A
Yeah, that's true. But have 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.
- [18:03]
D
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 1990 or something. So that debate was still there. But to answer your question, not to go 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 Apple approves $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, 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.
- [18:59]
C
Let me, 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, 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 is 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 like interact with General Electric? Like I know like 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, 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 is only a size so big that these companies can get before, like they're just bought up and gobbled up by Google. Like these are venture companies in many cases. And so like yes, anthropic is out there and OpenAI and maybe those are the next things. And who knows? It's, you know, obviously I'm not like an idiot. I'm not going to pound the table and say that Apple will never be outside the top 10. I'm not saying that. But I think that there's a real argument that we're still having the same conversation ten years from now about Google and Amazon and Microsoft and Apple.
- [20:50]
D
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? 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 hydropower 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 making movies, 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 like 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 gonna kind of flag, I'm store that away. I'm gonna flag that. Not a big risk, but that's interesting. They usually don't do that.
- [21:54]
C
Totally agree.
- [21:54]
D
It's hard to forecast the future is the big takeaway. And I was asked this question of like, well, isn't Spy. If you just own Spy, you own AI? Isn't that just a way to get AI exposure?
- [22:07]
C
And it's like, well, you could do worse.
- [22:08]
D
What's the central dominant macroeconomic market theme right now? It's AI. If you were going back to the early 1900s, it's railroads and oil companies that was at the top. So it's sort of a sign of the times and if 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.
- [22:36]
C
Well SPY and Shell. Spy and Shell 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 even last year. Like I think we 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, has had a tough time. If you look under the hood, most stocks have not beaten the benchmark because the benchmark gains have been concentrated in the biggest stocks and the biggest winners. Like it's no great mystery and whether I like fizzles out and you know, whatever. And then there's something else. Like you're going to ride the ups and downs of innovation and you're going to, you're going to get capitalism. Like that's, that's spy.
- [23:16]
D
Yeah. And if we look at the returns last year and again it's just one year but these are instructive of a prior year's two. And the numbers will move around. But in SPY's category US Large Cap Blend, only 31% of managers were able to beat their benchmark. The average excess return was minus 200 basis points brittle. So like looking at the win loss record like that's not a great record and be like oh okay, well I'll just own, I'll just own spy. 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.
- [23:46]
C
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 just, just let the 493 have their, 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 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 air. I think you know, not. I think I do, I love it. I think it's wonderful.
- [24:31]
D
So 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.
- [24:43]
C
Guilty.
- [24:44]
D
Yeah. I mean, everything has to have its nice little neat box. And Mag 7 is obviously a great name. Fangs, These are great monikers. But even classify them all as one homogeneous group is not really fair either because their growth trends are completely at odds with each other. Like Nvidia is forecasted to 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.
- [25:36]
C
It's not just a new entrant, it's a monster potential entrant. 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.
- [25:54]
D
I mean, look, what Overnight, right? So Netflix, the day before we're recording this, they came out with earnings and they great earnings, 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. No one saying that Netflix is going to do that. I love their shows, I love their algorithm, feeds me all the great stuff. But like, this is that largesse. Like you get big, you get bigger and you 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 I would say that.
- [26:35]
C
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.
- [26:46]
A
But like, yeah, Jeffrey west, there is.
- [26:48]
C
Just a limit to how big buildings, organisms, companies can get before they just buckle. And can, 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.
- [27:05]
A
Well, I guess and I think the, 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. 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 in 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, it's not always going to work like that. So they've changed their whole way of doing things to build out AI in all the data centers. And that's the, 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.
- [27:46]
D
Well, I think that's one of the interesting things about the whole AI trade is their capex is going to these infrastructure, ecosystem builds where if you look at last year, 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 and their flow patterns, they had the, I think the second most flows out of any other sector behind tech.
- [28:28]
C
Wow.
- [28:29]
D
Because the investment is going there. Right. It's that sort of first source of investment where they're getting all that capex and they're not having to prove any monetization of it. Right. The electricity demand. And that's another thing, like 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.
- [28:55]
C
Matt, last question for me. If we could fast forward to December and you got to know one thing about how this year went, 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 know this is impossible exercise, but hey, I asked the question, what piece of data? What piece of data would you want.
- [29:15]
D
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. 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, and we can probably ebb and flow. So that will tell me if we have a risk of upending the apple cart of the good times that we've been on.
- [29:49]
C
Let me just follow. I have one follow up to that.
- [29:51]
A
Wait, Michael, what's your answer to that question? Do you have one?
- [29:55]
C
I would have said earnings.
- [29:56]
D
Okay.
- [29:58]
C
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 alarming? Wait, why is it so low? Or would you say, oh, it's super accommodative? I'm curious what your take would be on that.
- [30:11]
D
I would say so. It's hard for 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, and 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 is that a risk to the economy with lesser jobs if growth is really high? So it's that K shaped economy.
- [30:45]
C
You want to rethink your answer? I'm really teasing. No, but I'm teasing. But this goes to my point. If the Fed is at 2, like, is that bullish because things are so bad that they're being stimulative or is it, is it just bearish because what happened?
- [31:00]
D
I just would want to know how we got to 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.
- [31:15]
C
And around and around we go. Okay, Matt, this is awesome as always for people that want to learn more about spy. Now that you need any introduction, where do we send them?
- [31:22]
D
So you can go to statestreet.com investmentmanagement.
- [31:26]
C
Okay, thanks as always.
- [31:30]
A
Okay, thanks to Matt. Thank you to State Street. Remember, check out statestreet.com investment management to learn more and email us animalspiritsompoundnews.com.