random-ish musing (ii)

Alarming reports about the spread of the pandemic in the south and west have stopped the stock market in its tracks over the past few days. The bad news is coming primarily from states that decided to believe the wishful thinking of the administration rather than the country’s health experts. One consequence of this has been a new round of economy-damaging moves–proposed new tariffs, for example–by Trump as he tries to distract attention from the human tragedy he has created.

Taking off my hat as a citizen and putting on my investor cap, the main stock market issue is that the spread has reached prime vacation destinations, where local governments have made no preparations for its arrival. Therefore, summer travel is dead and, unlike many overseas areas, the US consumer economy is not going to reopen soon. Are we back to the buy NASDAQ/sell R2000 (or buy NASDAQ/sell the Dow) trade that has been the key to stock market success for most of the Trump administration?

A problem: NASDAQ is expensive and the degree of its outperformance over R2000 is very, very large by historic standards. So it’s a reasonable first guess that the spread won’t get much wider. In fact, the gap had started to close before news of the virus spread came out. On the other hand, the domestic economy is being handed another setback by bungling governors and typical summer vacation travel destinations have become virus hotspots. So it’s also reasonable to conclude that the NASDAQ/R2000 spread will get wider and that the R2000 rebound will just be more ferocious when it happens sometime down the road.

Where do I come out on this?

–One of the first things any successful portfolio manager learns is that you don’t need to have an opinion about everything. Just the opposite. You need to have strong (and correct) opinions about a few non-consensus things that you shape your portfolio around. For now, I’m choosing not to change what I hold to bet on what will happen to the NASDAQ/R2000 spread.

–Regular readers will know that a while ago I made a small shift to reduce the size of my very large pro-NASDAQ overweight. That hasn’t worked out well so far, but I don’t care. I want to do more–which I look at as locking in some of the outperformance I’ve achieved so far this year. But I’m guessing that I may have a better chance to do so over the summer. In other words, from a short-term-tactical point of view (sort of like betting on whether the next pitch will be a ball or a strike) I think the economically sensitives go down as NASDAQ more or less treads water.

A related topic (for tomorrow): how will the current situation ultimately play out? I think a lot hinges on the election in November.

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