Largest Inflows on Record

Investors have pumped almost $140bn into US equity funds since last month’s election as traders bet Donald Trump’s administration will unleash sweeping tax cuts and reforms in a boon to corporate America. The rush of buying made November the busiest month for inflows on records stretching to 2000.

Market Sentiment

1. Record Inflows and Risk Appetite:
2. • $141 billion flowed into US equities over the last month, marking the heaviest inflows ever recorded in a 4-week period.
   • This reflects a "risk-on" sentiment and signals the onset of a Santa Claus rally.
2. Bitcoin as a Market Indicator:
3. • Bitcoin’s rise to $100,000 is viewed as a precursor to bullish movements in the S&P 500.
   • Ethereum is expected to catch up as the next focus in crypto.
3. Trump Policies and Economic Growth:
4. • Deregulation, tax cuts, and strategic tariffs are expected to boost growth, reduce the trade deficit and lower energy costs.
   • A "Trump policy bump" supports a strong economy, with credit widely available and M&A activity expected to rebound.

Tracking the Appetite For Risk

1. IPO Index Performance:
2. • Newly public companies, often speculative, are hitting new highs.
   • Stocks like Cava and ARM reflect this growth trend.
2. High Beta vs. Low Beta Stocks:
3. • High beta stocks, including Tesla and Bitcoin, are outperforming, indicating favorable conditions for risk-taking.
3. Cyclicals vs. Defensives:
4. • Cyclical sectors are leading the market, supported by:
   • • Strong GDP growth.
     • Manufacturing confidence.
     • A robust but easing job market.
4. Sector Rotations:
5. • AI trade is shifting from chipmakers to software companies.
   • The focus is on companies using AI rather than hardware providers.

Potential Risks and Corrections

1. Overextension Risks:
2. • High levels of calls vs. puts suggest the market could face a "snapback."
   • A 2-3% correction is anticipated in late December or early January as a healthy reset.
2. Inflation and Fed Policy:
3. • Rising inflation could derail the rally if it exceeds expectations.
   • Upcoming CPI reports and the FOMC rate decision on December 18th are pivotal.
3. Market Breadth Concerns:
4. • Over-concentration in certain sectors like crypto, software, and consumer discretionary may pose risks.

Investment Strategies and Recommendations

1. AI Trade and Software Growth:
2. • The rotation towards software within AI is gaining momentum, while semiconductors face bearish divergence.
   • Investors are advised to focus on companies using AI to transform end-user experiences.

Conclusion

The market is entering a period of strong bullish sentiment, supported by record inflows, a robust economy, and favorable monetary policy. However, risks such as overextension and inflation require vigilance. Strategic sector rotations and a balanced approach are key to capitalizing on opportunities in this environment.