thinking about the US stock market


There’s a struggle going on in the market between secular growth stocks and business-cycle sensitives. This contest has two parts: valuation and concept.


If we look at the performance of NASDAQ vs. the Russell 2000 over the past 2 1/2 years, the former has outperformed the latter by an almost unheard of amount for a developed country. Relative valuation alone argues that the R2000 should have its day in the sun.

One would expect balance to be restored by some combination of NASDAQ losing relative ground and R2000 going up. The immense money and fiscal stimulus coming out of Washington suggests the central tendency of stocks will be up, so NASDAQ could conceivably do its part to restore valuation balance by simply standing still.


On the other hand, this performance differential is arguably justified. Thanks to Trump’s epic incompetence, the domestic economy has been increasingly weak–both vs our own history and results in most other places (not the UK) since the effects of the 2017 tax cut have warn off. And the R2000 is much more closely tied to the US than the more global NASDAQ. Every recent rally attempt by the R2000 has petered out in short order–although the one now underway may have more legs than its predecessors.

Then there’s the pandemic. Washington has spent trillions of dollars, correctly so in my view, to prop up a country being ravaged by a deadly disease. Unfortunately for us, with his usual blend of insight and judgment, Trump has armtwisted states like Florida, Texas, Arizona et al into lifting quarantine restrictions much too soon. The result has been that while Canada and the EU have Covid under control and are revving up their economies, we’re seeing the virus flare up again with huge increases in new cases and red-state hospitals and funeral homes overwhelmed. He’s now, in inexplicable fashion, compounding his error by pressuring schools to reopen shortly, amplifying the risk of disease to both students and teachers.

All this implies both that another round of aid from Washington may be necessary to offset Trump’s gaffe and that the domestic economy will be relatively weak for longer than hoped–and longer than any other OECD country. (The financial press has begun to link Trump’s handling of the coronavirus with his disastrous foray into Atlantic City gambling, even though the fact that he’s done this sort of thing before isn’t a great explanation for why he should be doing it again.)

Other worries: the national debt is now higher as a percentage of GDP than it was at the end of WWII, and the budget deficit is already approaching $4 trillion.

Concept, then, argues that investors should continue to do what they’ve been doing for the past couple of years–stay as far away from the domestic economy as possible.

strategy: i.e., what happens next?

I think we muddle along for a while. But the two big questions that I see eventually coming to the forefront of the market’s consciousness are:

–in November, will the US reelect a white racist economic illiterate who has crushed GDP growth, who’s a fanboy of corrupt dictators, who seems to revel in the suffering of others and who appears to be unraveling mentally before our eyes? It says something about the parlous state of domestic politics that the answer is not clear.

–how/when/at what cost does the country begin to clean up the gigantic mess Trump, his administration and his enablers in Congress have created?

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