It’s all about “the new 60/40.”

A few days ago, I cited Nomura’s Charlie McElligott in describing professional investors’ inclination to barbel their equity exposure by pairing longs in red-hot semis with longs in energy. He called that “the new 60/40.”

Hopefully, you know what’s wrong with the “old” 60/40. For those who need a refresher, I’ll quote myself from the April 4 Weekly:

We live in a post-Great Moderation, post-neoliberal world defined by, among other things, the return of “great power” politics, the demise of multilateralism, competition for (instead of cooperation around) finite resources and de-globalization. All on the heels of the pandemic fiscal expansion across the developed world. That’s an inflationary cocktail or, at the least, it’s conducive to recurring bouts of inflation — inflation volatility. That, in turn, means bonds aren’t the foolproof, negatively-correlated hedge for equities they used to be.

Simply put: The correlation assumption at the heart of the 60/40 religion may be dead. Far from a safe harbor, bonds are just as often the locus of concern in the new Roarin’ 20s — a source of portfolio volatility.

What to do? Well, you could buy energy stocks. They’re “the risk-off vehicle in the current backdrop” to the extent they “insulate” investors from “the global supply shock and ‘molecule shortage,'” McElligott said Thursday.

The risk-on vehicle is tech, semis and the hyper-scalers, which are “going from $600 billion of capex in 2026 to upwards of $1 trillion in 2027,” Charlie wrote. The proof, as they say, is in the eating. Here’s the eye candy:

Overall and risk-adjusted returns for the semi-energy barbell are dramatically higher versus a traditional, equity-bond split, both since the beginning of the year and since the war started.

This is rough for mutual funds, who don’t (and in a lot of cases can’t) own “enough” mega-cap tech. As it turns out, they don’t own enough energy either.

The figure below, again from McElligott’s latest, gives you a sense of mutual funds’ rather unfortunate predicament.

As discussed here on at least two occasions over the past week (see here and here), semis, tech and energy account for the entirety of a big upswing in forward profit expectations.

It’s thus no surprise that the market’s “acting like it’s short ‘the new 60/40,'” McElligott went on.

Of course, at the end of the day, energy stocks aren’t bonds. As unpalatable as the latter might be in the context of this decade’s macro-geostrategic zeitgeist, equities are a risk asset.

So, if you want to “sleep peacefully at night” with your semi-energy barbel, you may want to consider “hedg[ing] that bad boy with some convexity via the VIX call wing and/or the SPX put wing,” Charlie added.