Tectonic Shift or Head Fake? Cameron Dawson on the Market’s Next Move

0:00I think we cannot underestimate that you have record high exposure to stocks in household accounts based on flow of funds from the Fed, which just suggests that U. households have never been this exposed to the equity market. So they are more dependent on the equity market continuing to go up than they have ever been based on that data. So the move thus far has all been about effectively valuations and positioning getting recalibrated. To make this last longer, you have to see it reflected in earnings. The thing that differentiates tectonic shift versus counter trend rally is durable fundamentals and i think that still remains to be seen as to whether or not you can really see the the value areas of the market uh sustain earnings growth that is much faster than the growth areas the one thing i would watch with gold going forward is we've been referring to as like the sort of damocles effect of that you become a victim of your own success, where gold's ability to be the diversifier in portfolios starts to get eroded as people become more leveraged to it and have more holdings of it, meaning that the more parabolic you go, the more likely that gold and equities are going to trade in tandem.

1:21The biggest killer to performance is hubris, right? Hubris is the thing that causes you to not see the risk around the corner because you think you know everything. Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. The Master Investor Podcast is sponsored by BNY Investments, LSEG and Interactive Brokers. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice, or a personal recommendation.

2:07More on that in the show notes. My guest today is Cameron Dawson. She's the Chief Investment Officer at New Edge Wealth and has been in that position since 2022. Before that, she was Chief Market Strategist at Fieldpoint Private securities and before that begun her financial career at Bank of America as an industrials analyst. All of that was preceded by a stint as a professional ballet dancer, which we might come to as well a little bit later on. Cameron, welcome to the Master Investor Podcast. Oh, well, thank you for the introduction and thank you so much for having me. And last time we spoke, Cameron, I think you were still at field point.

2:47Maybe you just made the switch to New Edge. But either way, I have to admit, I hadn't fully researched New Edge before preparing for this conversation. And I love that on your website, you guys say you're looking to give clients the edge, which, as you just heard, is one of my taglines for this podcast. I promise you I didn't steal the phrase from you. It's the first time I see that you guys have it. Yeah, yeah, yeah. No, but tell us what New Edge is, though. So New Edge Wealth is a RIA that's based here in Stanford, Connecticut, where I'm sitting today. But we have offices all around the country.

3:26And we focus on serving ultra high net worth investors, family offices, as well as institutions. We have invested and built an incredible platform on the investment side of things and well set strategy side of things that allow us to come to clients with really bespoke, spoke tailored kind of solutions to help solve more complicated problems. It's the coolest job that I've ever had because being able to work in accounts of this size, it allows us to look at different asset classes that are usually beyond the traditional 60-40 kind of complex, doing really interesting work within alternatives as well as traditional assets as well, bringing it together with really intelligent wealth strategy advice and different kinds of strategies.

4:12So it's been an absolute whirlwind of a four years, which I'll hit my four year anniversary in May of this year. We might come back to New Edge specifically and certainly to your career a bit later. But let's dive into the market snapshot right now, Cameron, and put Friday's bounce aside. Clearly, there's been a bit of a pullback, a bit of a sell off of late. What do you think the trigger for that has been? So it's been rotational. This market has had strong rotational undercurrents really since the beginning of November. What we saw going up until what we were calling the fever pitch silly season rally in September of October is growth got way stretched.

4:51Whether we're looking at the classic MAG7 names, the broader Russell 1000 growth index, a lot of speculative parts of the market, all got to the point where growth was trading at that point at 85 % premium to value. So you were definitely with that stretched rubber band. And ever since the beginning of November, we've been in an environment where the leadership has certainly shifted. It shifted away from tech and into things like value that includes energy, industrials, materials, and financials. And so one of the things that happened over the course of last week, of course, is that the magnitude of the downside within the growth side of things became even greater because of what was hitting software names.

5:31And if we think about software, it's so important as kind of the stalwart of quality in the overall S &P 500. One of the reasons that we've been talking about such high valuations in the S &P is because a lot of people will say, look, the S &P deserves a high valuation because look at these high recurring revenue businesses with great free cash flow margins and great return on invested capital. But now all of a sudden we're starting to question some of the viability of those areas of the market going forward. So it almost became too much of a weight at the beginning of last week, given the downside moves that we saw in the software names for these other areas to make up for that weakness.

6:08So it does appear that we had a little bit of a bounce on Friday, still a little bit of a choppiness to start the week. We're not at all surprised by the volatility just because, again, you were starting at such high valuations. And in that kind of environment, you have very little cushion to absorb any change in narrative and any kind of bad news. And I've seen you reference this actually sort of six months ago, so before the recent rotation really started. But do you take lessons from the nifty 50 as to kind of warning signs for now? Are we now in the midst of that warning sign kind of being legitimate?

6:42Just expand on that for me a bit. It is so important because we have two periods of time that we can go back to in history where we had peaks in valuations as well as peaks in market concentration. You've mentioned the nifty 50, which, of course, peaked in 1968. And the end result for the market is that the nifty 50, which was this group of stocks that you just had to own. They were going to be the stocks that dominated. They ended up causing the overall market index to trade effectively sideways for the next 14 years. There was a lot of volatility along the way. And those nifty 50 names grew earnings faster than the rest of the market, but they didn't deliver the price return because they were priced for so much perfection at the peak of that concentration.

7:25We, of course, had a similar concentration peak that was even more extended back in the period at the fever pitch of the tech bubble back in 2000, where markets were very expensive and very concentrated. In result, of course, we remember what happened where you had the bear market in growth versus value over the course of the next effectively six years. So we've been asking this question a lot. Is this the start of a tectonic shift that looks like a 2000 to 2006 period where the leadership isn't just handed over to value for one month or three months, but is handed over to value for a consistent period of time that could last multiple years.

8:05I think the most challenging thing about this seat and being a market watcher is that the start of a tectonic shift looks a lot like a countertrend rally at first. And right now, if you look at the long-term trends, they all still kind of look like counter trend rallies. It doesn't quite look like the start of a tectonic shift. But I think we have to, my favorite quote is by is Goethe and he says, few people possess the imagination for reality. We have to at least have these discussions of having the imagination for reality of what it would look like to have a period of prolonged value outperformance.

8:45I want to make one last point just to be very wary when we think about things like growth versus value and and rotations in leadership, value looks a lot more growthy than it used to. Names that are in the value index that might surprise you, Amazon, Google, Meta, Micron. So a lot of the names that we would typically consider more growthy names have now made their way into the value index. So that might not be the perfect hedge if you're looking to bet against some of this market concentration. And how do you try and weigh up? I mean, maybe this is a question for the end of the episode, not the start, if it is a tectonic shift as opposed to just something temporary?

9:27I think the big difference is whether or not it's supported by fundamentals. Countertrend rallies, so these short head fake kind of rallies, tend to be driven by valuation recalibrations and positioning. So if you go back to that peak, as I mentioned at the start in October, where growth was really outperforming value, you had that valuation stretch, but you also had a peak in the positioning concentration where people were max long mega cap growth and max short defensive areas like your financials, industrials, and materials. So the move thus far has all been about effectively valuations and positioning getting recalibrated.

10:06To make this last longer, you have to see it reflected in earnings. And that's why that That experience back in 2000 to 2006 is a great reminder as well, because not only was growth underperforming, but you had value in cyclical areas doing well because you had a driver like the industrialization of China. So China industrializing created this huge demand for the old economy, for materials, and for all these construction-related stocks. And that's what helped boost those parts of the markets in ways that were able to counter or offset what was going on in growth in tech. So the thing that differentiates tectonic shift versus counter-twin rally is durable fundamentals.

10:49And I think that still remains to be seen as to whether or not you can really see the value areas of the market sustain earnings growth that is much faster than the growth areas.

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11:28I wanted to kind of pause and talk a little bit about, you know, you've got a great perspective on this from New Edge Wealth, but the importance of the wealth effect to the American economy. And for our British listeners, you know, I think it's hard to grasp quite the extent to which Americans kind of act based on how they feel. But is that a factor that is at the moment kind of hiding what would be a slightly weaker economy because the wealth effect clearly is so strong when markets are so high? One thousand percent, yes. We think it's one of the reasons why you've been able to see this huge divergence between overall personal consumption and real wage growth.

12:09So if you look at personal consumption growth on a real basis, it's up by 1.6 % since April of last year. If you look at real wages, it's actually down by 0.6%. So that gap between what people are earning and what they're spending is either fueled by drawing down savings rates, which we know the savings rate has fallen to multi-decade lows, as well as benefiting from the wealth effect. And we know we have this K-shaped economy dynamic in the U.S. The top 10 percent of consumers generate 50 percent of the consumption in the U.S. Those top 10 % of consumers also tend to have the highest cash balances.

12:49They enjoy high interest rates. They also have the largest exposure to overall equities. So that top leg of the K has really benefited from this strong market. The other thing to note, typically when you see a drop in savings rate, it is coincident with household net worth going up. When your stock prices are going up, your stock accounts are going up, when your home prices are going up, people tend to save less. and then spend more. And I think that's one of the things that has kept the U.S. consumer afloat. And what that means is we've been in effectively a positive feedback loop between the economy and the stock market, meaning stronger economy makes a stronger stock market, which then boosts a stronger economy.

13:33The one thing, and I got asked this recently, what keeps you up at night? I'm like, that feedback loop going negative. Effectively, a more protracted period of stock market weakness, which weighs on consumer growth, which causes more protracted stock market weakness. It's not a base case, but I think we cannot underestimate, given the fact, and one last point on this, is that you have record high exposure to stocks in household accounts based on flow of funds from the Fed, which just suggests that U.S. households have never been this exposed to the equity market. So they are more dependent on the equity market continuing to go up than they have ever been based on that data.

14:12And what do you think would be enough, either in terms of size of drawdown or perhaps persistence of a drawdown, how long it lasts, to change the wealth effect to being negative? I mean, short term blips, I'm sure, don't make a difference. I think that's exactly right. that if you use April as the example, April, you had some weakness in March. So people saw some of the softness, you know, maybe in their first quarter statements because prices had started to draw down. But the April drawdown was so swift and then rebounded so quickly, effectively intra-month, that it made it when people were seeing their accounts, if they didn't open their account on effectively, or their account on April 3rd, they might not have gotten that scared and it would not have dented consumption.

15:01So I think your point is exactly correct, that it's likely the duration of the correction, not really the magnitude. The magnitude, of course, will be important, but there's a very different feeling of stocks going sideways even for a year versus them going straight up as they had been. So I think that if we were to see a period of protracted sideways stock action rotations under the surface, don't forget a lot of popular retail names have retail areas have gotten hit really hard. Gold, silver, Bitcoin, momentum stocks, software areas, tech overall, mag seven, all areas where retail has played very, very heavily.

15:42So it could be that the overall index is masking some of the pain we're seeing potentially under the surface with that wealth effect. I guess before we move on to specifically the Fed and Kevin Walsh, a broad question on that, the importance of the wealth effect and I guess how invested this administration seems to be on things like that. Do you think it means invariably if there is a protracted big drawdown, whether it's Treasury or Fed or both together, that they'll step in again? Yeah. So my colleague, who's our head of portfolio strategy, Brian Nick, has been joking that the number one policy priority for 2026 is don't let the stock market go down, which is nice to think that you can try.

16:29right? You know, the stock market is wily, right? It's, you know, Walter Diemer has his rule of perversity, which is the stock market will do whatever it takes to make the greatest fool out of the greatest number of people to the greatest possible extent. One of the things that's the consensus narrative for 2026 is how could you possibly be bearish stocks or not expecting big gains, maybe just neutral stocks when you have a Fed that can become accommodative, when you have so much fiscal stimulus? How could you, and you're in a midterm election year, how could you possibly be dubious of big returns?

17:05The reality is that the data suggests that midterm election years are actually the years with the weakest returns of the entire four-year election cycle. So midterm election years, and this is great work that was done by Michael Howell, where he notes that midterm election years deliver the best earnings growth, but then they also, they come with the worst price returns. So you're right, fiscal stimulus, it juices and boosts earnings, but it does not translate necessarily to strong stock price gains. That said, I've also seen you talk in the past about the importance of liquidity as a factor that sometimes gets overlooked when earnings revisions are positive and everyone is looking for upside.

17:48So how big a weight in your decision making do you give to the outlook for liquidity? And isn't it already picking up even as Powell departs? Yeah, well, so liquidity is one of those, it's sort of like dark matter in the universe. Everybody knows it's there, and you can measure it, but people have a lot of debate as to what it is and how it exists and its role and influence on other things. Liquidity is incredibly important. And I mentioned Michael Howe, who's kind of like the king of liquidity tracking. And he's been making the argument that the global liquidity cycle has actually peaked, meaning that liquidity is turning into not a tailwind anymore, but a headwind.

18:37And you can potentially see some of that in the trading behavior of things like Bitcoin. Bitcoin has typically been associated with tighter liquidity environments of when you've seen drawdowns in that asset class. Think of a time like 2018 or 2022, both times when the liquidity tide was receding. Now, does that liquidity tide continue to recede if we're talking about potentially seeing a treasury-fed accord that could look like yield curve control? Do we where there were not only would they be trying to suppress rates on the long end, but buying up a bunch of bills on the front end in order to help the Treasury fund itself.

19:16That seems to be potentially liquidity positive. If we continue to get rate cuts that, you know, of course, something to watch. But I continue to defer to Michael Hall as he's the one who tracks all these cycles and has been arguing that the liquidity cycle peak is in. That's really interesting because I guess people's expectation is that if it's not starting to pick up already, that it will do when the Fed chair changes. So I think that's a really important note to pick up on.

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20:19Hi guys, it's Wilf. I hope you're enjoying this episode. Just a quick reminder to please hit follow or subscribe on your podcast or video app so that you never miss an episode. And if you've got time, please do give us a five star rating and leave us a comment. It really helps other people find the podcast too. Now, back to the episode. Why don't we just move on to gold and Bitcoin a little bit? I mean, what do you think drove gold up so aggressively over the course of the last 18 months. Is it an expectation of more liquidity to come? And based on what you just said there, is the top in on gold?

20:59Yeah. I keep putting up the meme from Anchorman where Will Ferrell, Rob Burgundy says, well, that escalated quickly. We saw something that was starting as sort of this normal bull market and then got very, very out of hand very quickly. There's a few things to point out. The first one is that you cannot ignore the fact that there was a lot of speculative behavior that happened as gold went parabolic and silver went parabolic. And we can all read the articles about how much speculation and leverage around the world, not just U.S. investors, but there's a great article in the journal talking about the Chinese antis who were, you know, going to gold stores and hoarding gold because of the bull run as a safety trade for themselves.

21:41We also cannot ignore the fact that there's been a lot of central bank buying after the invasion of Ukraine by Russia and that you had this weaponization of the dollar that kind of drove some central banks to buy more gold. Then the other aspect of the gold run that drove it higher was effectively this, what we call this, and this is from a friend, Dave Nadig, who calls it a psychological commodity. And that's how we frame both gold and Bitcoin. And we call it a psychological commodity because it's not about the thing happening itself. It's the fear of the thing happening that drives the price higher, which means that if you are bullish on gold and Bitcoin, buying it because you think the world is going to end in some kind of big flame of government debt, that it's not about that actually happening.

22:31It's about other people having that same fear as you that drives the price and the demand higher. And so what's fascinating is that I think that the most bearish thing for gold, and this is going to sound very through the looking glass and upside down, but the most bearish thing for gold would be a series of hot CPI prints. because it's a sell the rumor, buy the news, or buy the rumor, sell the news in this situation. Because the whole reason why gold has been rallying so much is you go, oh, wow, okay, so you're going to have easy Fed policy, you're going to have easy fiscal policy, lots of debt, lots of things, you effectively juicing the overall economy, but really no care about inflation.

23:17Doesn't that lead to dollar debasement? I want my gold. But if you get a hot inflation print or a series of hot inflation prints, it effectively says Fed's back is now in a corner. They can't cut rates as much as you expected. They actually have to be more disciplined. And don't forget, gold underperformed in 2022. Gold was down in 2022, the year of inflation. So when the thing that you are afraid of when it comes to a psychological commodity actually comes to pass that usually is the negative bearish thing that causes it to correct. The one thing I would watch with gold going forward is we've been referring to it as like the sort of Damocles effect of that you become a victim of your own success, where gold's ability to be the diversifier in portfolios starts to get eroded as people become more leveraged to it and have more holdings of it, meaning that the more parabolic you go, the more likely that gold and equities are going to trade in tandem.

24:18And so then if you're hoping your gold is going to be the ballast of your portfolio during some kind of equity market swoon, it's likely not going to play out that way. It doesn't mean that it can't still be in a bull market. The technicals still look actually really good. I mean, so it has this correction. It doesn't even touch its 50-day moving average, and it rallies right back up off of it. We've been calling gold Chuck Norris. You know, nothing stops it. It's, you know, it's swam to the top of the mountain. So, you know, at this point, it still suggests that the uptrend is very much intact, but it comes with the caveats of probably higher correlation to equities and probably higher volatility given the parabolic move.

25:01Yeah, when it escalates that fast, to use Anchorman phraseology again, it's hard to keep going in that direction. Let's go bring it back to the equity market. And I guess the rotation you alluded to at the top and the extent to which that's got more legs. And with that in mind, which sectors you like the most, where do you stand on energy? Yeah, energy is probably one of the most fascinating areas in the market right now, because it encapsulates this dynamic of, is it just positioning or is there something real happening? So we like having energy allocations within our equity portfolios because they are the hedge against some kind of inflationary shock, meaning that if you are in an environment where inflation is surprising to the upside and the Fed is backed into a corner, you are likely also seeing a rally in oil prices, remember a year like 2022.

26:01And so it acts as a little bit of a geopolitical hedge as well as a hedge on inflation upside surprises. That being said, energy has been in a huge downtrend ever since oil prices have peaked back in the middle of 2022 when your gasoline prices peaked at$5 a gallon and we've been marching ever lower ever since. And so the question is, as we've started seeing this turn in the stocks, they've been fantastic performance to start the year. You haven't really seen a concomitant increase in oil prices. You've seen a little bit of a jump, but not enough to suggest that you're seeing this big upside surprise to oil prices that would translate to higher earnings estimates for energy companies.

26:47So if you break down the earnings estimate forecast, what you can see is that they're actually still getting cut for 25 and 26 for the energy sector. So for now, we would classify it as this still looks to be positioning and a rotation into a laggard, kind of that classic last shall be first kind of rotation. And in order for it to have legs, you have to see oil prices move higher and that has to translate into higher earnings estimates. What about your old friends, the industrials? Oh, man. Boy, are they expensive. I kind of wish that I still covered the industrials because I'd finally be cool and in demand.

27:26I covered the industrials through the industrial recession and nobody wanted to talk to me because the stocks were so bad. Now they're cool and they're almost too cool. So what's really fascinating about the industrial cycle that we've seen is that for the last three years, the PMI, the Purchasing Managers Index, has effectively been below 50. There's been one little blip higher. But let's say it's been in contraction for three years. We've never seen such a protracted contraction in the PMI. But that actually didn't translate into weaker industrial earnings. Industrial earnings are already at all-time highs on a 12-month forward basis.