I’ve updated my Keeping Score page for September and 3Q performance.

If we look at 2026 so far as a whole, that stands out to me is that two sectors, IT and Communication Services (where most of the AI firms reside) together make up 47% of the total index, according to Gemini.

In a sense, everything else is tiny in comparison. But two very small natural resource sectors, Energy and Materials, who are also big ytd winners, together also make up about 5% of the index. All this is to say that the remaining 48%, which represent the heart of the domestic economy, is significantly weaker than this year’s overall stock market strength–keeping pace with the rest of the world for the first time in this administration–would lead one to believe.

Typically, in situations like this the market has tended to experience what jargon lovers would call a counter-trend rally–where the ytd losers go up and the winners go down. No sign of this so far, though. No sign either of any takeover interest–foreign or domestic–in down-and-out domestic firms with powerful brand names and distribution networks. This is also an unusually pessimistic stance.

Still, there’s no sign I can see that the market has any inclination to change its very heavy, very successful bet (1) for AI and (2) continuance of Washington’s wildly dysfunctional handling of national affairs.

As for me personally, most of my family’s money is in index funds. I have one account I actively manage, though. Early in the year I shifted away from a heavy emphasis on mainline AI-related names to less well-known suppliers of components/services. A couple of months ago, I cut my tech overweight in half and bought industrial and service names in the US and EU. Conceptually, I’ve been wanting to get involved with beaten up low-end consumer names as well, on the idea that the domestic economy can’t be bungled much more badly than it has been and these firms have potentially valuable brand names and distribution networks (the basic Warren Buffett insight of a half-century ago). I haven’t acted yet because none of the stocks I’ve been eyeing have shown any signs of life.

I also think that the upcoming election could have a significant impact on stocks. Hard to know what that might be, however. The worst outcome for the S&P, I think, would be a vote of confidence that ICE violence, tariffs… are the way to go.

It was clear from the outset that the Trump economic program, which can be seen as a copy of Japan’s rebuilding plan after the devastation of WWII, would create a rocky road for the domestic economy.

The three main ideas are:

–depress the currency, which will

–make imports more expensive, and

–discourage the use of foreign-born workers.

In the case of Japan, it was well-understood that the then current generation would suffer substantial economic pain, but the next generation, and those following it, would be substantially better off.

Unlike Japan, however, Trump has added ICE violence and foreign prison camps to the anti-nonwhite immigrant violence. This has revived memories in the rest of the world of similar episodes in Russia and Germany. And, assuming press reports are correct, the war in Iran is being masterminded by a man nicknamed “NoTabs,” to underline his lack of military knowledge and the absence of leadership skills.

…a real mess.

Taking off one’s hat as a human being and replacing it with an investor’s cap, a very important question is how long the current state of affairs will last. It’s also the point of this post.

I divide this into two issues, and look at what stock prices are saying today:

–when will consumer spending begin to pick up? Given that consumers have generally been trading down, I think an uptick in the price of dollar store stocks (based presumably on better sales) will likely be a good indicator.

OLLI (Ollies Bargain Outlet), which I regard as the lowest end of the dollar store market is up by about 20% from its early-July bottom. Year to date, it’s down by -22.4%–compared with a rise in the S&P 500 by +12.5% and NASDAQ by +15.7%.

DG (Dollar General), the high end, is also up by about 20% from its low in May. Ytd, it’s down by a bit more than -6%.

If we move up a few notches to WMT (Walmart), it’s down by almost 20% from its mid-year high and is slightly above its early September low of ~$102.

My read is that there’s not much to write home about in the dollar store industry but if I had to guess–I don’t have the confidence to want to do more than watch at this point–I’d think we’ve already hit peak trading down.

How do I explain WMT? I think it’s the last retail shoe to drop.

–I held KSS (Kohl’s) for a while on the idea that the value of its brand name and store network might be enough to entice a foreign company to make a bid for it. If not KSS, then some other similar-style company. KSS is down by -10.5% ytd, and up from its mid-May low of $11.50 or so.

This compares with book value of about $35.

I have no strongly held opinion, but it seems to me that no bid at $12-minus implies that no bid is coming. Why not? My sense is that the main issue is not the incompetence of the current administration (when was the last time a Defense Secretary had “No Tabs” (a nickname I hadn’t heard before but which I interpret as somewhere between “no basic military officer training” and “clueless”)?) but the black eye that comes from the fact that Congress and the courts are allowing organizations like ICE to prosper.

Whatever the reason, no investors seem to want exposure to the US economy as it has been shaped by the adminstration.

It will be interesting to see if/how the upcoming election changes this narrative.

I like to think about stocks in two related ways–concept and valuation.

Valuation is the price we pay for a stock today.

It’s a function of three things:

–the worth of the company as it stands now,

–the prospects for future earnings growth which will make the worth figure higher or lower tomorrow, and

–how these variables compare against the situation with every other publicly traded stock.

Concept is a bit more complicated. It’s three elevator speeches,

–one about how the company stacks up in terms of possible market share gains vs other publicly traded companies;

–one about prospects for the industry the company is in;

–a third about the shape of the overall economy–the US vs the rest of the world–which tells us whether to favor importers, exporters or whether this is a crucial distinction to make here and now.

To my mind, the most important of the three over the past few years has been the third.

Three reasons, all consequences of Washington politics.

–the first is the attempt to lower interest rates, as a way of decreasing the cost of government borrowing–put another way, to allow the government to borrow more than it could otherwise. This move has had the effect of weakening the dollar as foreign holders of Treasuries do this to lower their perceived risk.

–the second is tariffs, which not only raise the price of foreign finished goods but also the cost of imported raw materials used domestically.

–the last is the strong use of force by ICE that has the effect of retarding the growth of the domestic workforce or even shrinking it. …think of the Korean workers that ICE led off in chains last year, as they tried to open a battery factory in Georgia.

My basic idea has been to avoid the US consumer economy where possible, to focus instead on companies that have costs in $US and foreign revenues, avoiding $US revenues/foreign costs wherever possible. IT, especially software, is a prime example.

This has worked exceptionally well, until around a month or two ago.

A reasonable question to ask, but in any event the one I’m asking myself, is why the change?

The possibilities, as I see them. Either this is an issue of valuation, and the market will soon rotate back to the previous winners, or the market is now signaling a longer-lasting shift toward the domestic economy.

My guess is that it’s the former. My reason for thinking this is that low-end domestic retail has been especially weak over the past couple of months.

A rough approximation for the origin of revenues and profits for the S&P 500 is that half of each come from domestic sources and half from foreign.

concept

One of the major goals of the Trump administration has been to weaken the dollar, a strategy most often employed by developing economies to boost foreign sales while weakening foreign competition in the domestic market. A second is to shrink the domestic workforce, a move seemingly at odds with the first.

Still, the obvious portfolio shape that results from all this emphasizes (overweights) companies that have their revenues in foreign currency and their costs in dollars. Tech companies, software in particular, are the most obvious beneficiary. Any company that uses foreign currency inputs and sells to domestic customers is the equally obvious loser. Tariffs work as a multiplier on both the plus and minus sides. In theory, they fend off foreign competition, but they also raise the cost of foreign inputs for local companies.

valuation

Until recently, this has been a very successful portfolio structure. There has been rotation within the tech sector away from end product creators to component suppliers–some of the latter for the first time in years! This rotation itself is evidence that the primary market thrust has been getting long in the tooth. It isn’t that the companies involved have changed, however. It’s that the prices of the stocks of the primary beneficiaries have risen to the point where the secondary stocks are seen by the market as having greater value.

Recently, though, it seems to me that there have also been signs that market interest is starting to widen into the stocks of companies that depend on domestic demand. In a typical domestic business cycle, the targets would be less-than-stellar consumer stocks that have strong brand names and distribution networks but weak managements. As far as I can see, these continue to be pummeled. What appear to be perking up are strong consumer names whose businesses have been hurt by the Trump anti-growth economic/social agenda.

At this stage, I have no idea whether this market shift (which I bought into in my own portfolio a couple of months ago) is being driven chiefly by valuation, or whether this is anticipation that voters will call for a significant change in policy in the November elections.

I was reading the summary of an analysis of the US economy vs. US stock market this morning. It said, in effect, that hedge fund use of financial leverage to buy stocks (looked at another way, being short fixed income and long the stock market) was increasing the wealth of the most affluent Americans. This wealth effect, in turn, was causing this group to increase their spending on goods and services–and is a key aspect of this year’s rise in the S&P 500.

This could be so, I guess. The big issue that I see with this analysis, though, assuming I’ve read it correctly, is that the S&P 500 ex the Consumer discretionary sector is +12.6% year to date. Consumer discretionary itself, in contrast, comes in so far in 2026 at -4.1%–and the overall S&P 500 at +10.9%. Consumer staples, is also an index laggard, but at +6.1% ytd, has substantially outperformed discretionary spending.

My picture of what’s going on is a bit different. Last year could be seen as very much about capital flight from the US. This year, however, the S&P 500 and EAFE indices are more or less even year to date.

If there’s a theme to the S&P 500 so far in 2026, I think it’s orienting equity portfolios toward companies that generate revenues outside the US and away from revenues generated domestically. In 2025 this was key, given the currency decline Washington induced back then. Now, although I think it’s still important to have the same orientation of costs in dollars/revenues in other currencies, the broader conceptual issue, I think, is whether the Trump agenda, which has the effect of systematically shrinking the domestic economy, will continue to be at the forefront of US economic policy.

If so, I think this would trigger a substantial further portfolio shift away from the US and toward the EU, Canada, Japan, and maybe even China, as source of future economic growth.