We are all clear for a year-end rally, says HSBC's Max Kettner

Key Concepts

• December Market Outlook: Historically strong and low volatility month, but current market conditions are being analyzed for potential deviations.
• Federal Reserve (Fed) December Meeting: Expected to maintain current policy, likely no rate cuts, with supportive language.
• November Market Correction: Viewed as a "mini correction," particularly in crypto, and not fundamentally linked to the broader risk asset spectrum.
• Short-Term Positioning Signals: Indicators like VIX futures curve, put call ratio, and option skew are moving towards "buy" territory, suggesting an "all clear" for a year-end rally.
• Risk-On Tilt: Strong recommendation to tilt towards risk assets following the November rotation.
• "Buy the Dip" Strategy: The November dip is considered a non-fundamental opportunity to buy, contrasting with dips caused by fundamental concerns like weak earnings.
• US Consumer Health: High-frequency data indicates a resilient and strong US consumer, looking through government shutdown noise.
• Q4 Earnings Estimates: Slashed further in November, creating a setup where consensus is questioning the earnings spectrum.
• Crypto vs. Gold as a Hedge: Gold is presented as a more effective hedge against debasement and dollarization concerns compared to crypto, due to crypto's higher volatility and potential regulatory headwinds.

Market Outlook and December Expectations

The markets are starting December with losses, despite a significant rebound in the previous week. Historically, December is known for being a seasonally strong month with low volatility. However, the current market environment is being assessed to see if this trend will hold.

Max Kentner, Chief Multi-Asset Strategist at HSBC, believes that this December will likely not be significantly different from historical patterns. He anticipates that the Federal Reserve, in its December meeting, will likely maintain its current policy and not implement rate cuts. He also expects the Fed's language to remain supportive, which is generally positive for markets.

Kentner suggests that markets and investors may have overreacted to the November sell-off, which he terms a "mini correction," particularly in the cryptocurrency market. He argues that this correction has little fundamental connection to the broader risk asset spectrum.

Impact of November Correction on Positioning

The November correction has, in fact, brought many of the firm's shorter-term positioning signals back into "buy" territory. This includes indicators such as the VIX futures curve, put call ratio, and option skew. A week prior, these indicators were flashing signals closer to a buy rather than a sell. This shift is interpreted as an "all clear" signal for a potential year-end rally.

Tilting Towards Risk-On

Kentner strongly advocates for a "risk-on" tilt, recommending a 100% commitment to this strategy after the rotation observed in November. He views the November dip as precisely the kind of non-fundamental correction that investors should hope for. He contrasts this with dips that arise from fundamental concerns, such as significantly lower-than-expected earnings during reporting season, which can lead to questioning of underlying fundamentals.

The current situation, where tech and AI companies with high credit ratings are issuing debt, and the crypto sell-off, are seen as not making fundamental sense.

US Consumer Resilience and Data Insights

Regarding concerns about the sustainability of the market rally, especially given the nearly 16% year-to-date gains and questions about economic data post-government shutdown and during the holiday season, Kentner points to higher-frequency data on consumption. This data suggests that the US consumer is not only healthy but "rock and roll."

Specific data points mentioned include:

• Chicago Fed Cards Data: This has been increasing despite the government shutdown.
• Weekly Retail Sales: Have shown a rebound in the last couple of weeks.
• Visa Spending Momentum Index: Has been rebounding since the summer.
• Retailer Feedback: Numerous retailers reported good Black Friday sales.

Kentner argues that the US consumer is resilient and has likely "looked through" the noise of the government shutdown.

Q4 Earnings and Market Fundamentals

A significant fundamental shift in November was the further slashing of earnings estimates for Q4. This creates a scenario where consensus is once again questioning the earnings spectrum.

Crypto vs. Gold as a Hedge

The discussion touches upon the debate of whether everyday people should include crypto, specifically Bitcoin, in their portfolios. Kentner suggests that the recent volatility is more positive for gold than for crypto. He addresses the "debasement" narrative and the talk of the dollar's end as a reserve currency. While he doesn't subscribe to this view, he believes that if one wants to hedge against it, precious metals are a more effective tool than crypto.

His reasoning is based on:

• Higher Volatility of Crypto: Crypto exhibits significantly higher volatility compared to gold.
• Potential Regulatory Burdens: There is a possibility of regulatory headwinds for crypto, which precious metals are not facing to the same extent.

Therefore, for hedging against debasement and dollarization, gold is considered a more appropriate and less volatile option than crypto.

Synthesis and Conclusion

The analysis suggests that despite a recent dip, the market is poised for a year-end rally, supported by a strong US consumer and positive short-term positioning signals. The November correction, particularly in crypto, is viewed as a non-fundamental event that presents a buying opportunity. While concerns about earnings persist, the overall outlook leans towards risk-on. Gold is highlighted as a more reliable hedge against potential economic debasement compared to the more volatile and potentially regulated cryptocurrency market.