It’s that time of year again… Summer has arrived in Australia. Santa is packing up his sleigh and readying the reindeer for their annual pilgrimage. And people in finance-land are embracing the “Christmas rally” whilst looking forward to what the next year might bring.
“Tail Risks”. That is, the possibility of an event occurring that falls outside of the “expected” set of outcomes, according to a normal probability distribution.
We might currently be in a “fat tail” situation. That is, a “higher than normal” probability of negative things happening that impact share market returns.
There's lots going on in financial markets at the moment, including a big disconnect between the bond markets, gold and tech. One commentator is calling it:
“The set-up is the most exciting macro and value combination play on both the long and short sides of the markets that I have seen in my career. It is what I have been calling the Great Rotation."
So, whats working at the moment and where is the opportunity?
The new year is well underway now. So far, the year is tracking much the same as the previous year ended with many of the trends continuing.
As I write this, the US S&P 500 is up around 9% so far this year. That’s roughly around the long-term average annual return.