2020 = an epic market year …but what comes next?

Actually, a lot hinges on your point of view. Look at this list:

ytd past month from 11/9

ARK genomics etf +129.9% +9.9% +2.7%

ARK internet etf +124.4% +9.0% +3.3%

ARK innovation etf +114.6% +8.3% +4.1%

ARK fintech etf +89.4% +5.7% +0.7%

an average-ish growth fund +58.0% +2.9% -1.4%

NASDAQ +34.2% +3.2% +1.2%

NASDAQ 1000 growth +29.3% +1.2% -1.1%

S&P 500 +12.5% +2.9% +3.5%

Russell 2000 +9.0% +10.8% +12.7%

Dow Jones Industrials +5.3% +4.4% +6.1%

What to make of this:

Although I’m too lazy to break out the figures in another column, the reversal of form away from multinational/secular change growth names to smaller, US-centric stocks began the day after the presidential election. It accelerated a week later as the magnitude of, and certainty in, Trump’s loss became clearer.

I view this movement as analogous to what happened after Trump’s victory in 2016. Back then, the market understood a large corporate tax cut was on the cards and immediately reversed its pre-election swoon. Four years later, having seen the extensive damage to the country from the administration’s economic idiocy, the idea that Trump would be out of the Oval Office has now produced a sharp rally in beaten down domestic stocks of the Russell 2000. Pre-election, the R2000 was, shockingly, in the minus column ytd–at a time when 50%+ returns were there for the taking by even average-ish managers who just stayed as far away from domestic-oriented names as possible.

Btw, I didn’t know whether to laugh or cry to hear Trump taking credit for the Dow’s 5% ytd date rise as “his” doing. He might just as easily said how wonderful and “sacred” is that the Russell 2000 had a capital return of zero from the beginning of 2018 through the week before the election.

finally getting to the point

…which is the mammoth valuation difference that has opened up between winners and losers, as the chart above shows. The spread between what I’ve called the capital flight trade and an ill-fated bet on Trump being competent happened during his pandemic bungling. The first three years of Trumponomics were also epically bad–1/1/17 to 12/31/18, the R2000 was up by 22%, NASDAQ +71%, the ARK innovation etf +143%–in comparison with anything but 2020.

The key question for us as investors is whether the current market dynamic can continue. My answer is that, although anything can happen, the fuel tank is pretty much empty on the 2020 rocketship.

Two reasons–really two aspects of the same reason:

–Trump is gone (although if press reports are correct, he and his cronies are using their last days in office to trash the federal government apparatus as much as possible in order to make Biden look bad as he takes over). Because Trump has wreaked much of his havoc through executive orders, Biden can reverse those relatively quickly. So in, say, next September, the domestic economy may be in better shape than we now expect

–interest rates are more or less zero and probably won’t go into negative territory. As/when they begin to rise again, P/Es will start to contract (as cash becomes more attractive).

Both reasons imply investors will become less speculative.

what to do

The classic technique, and the correct one, in my view, is to take out a metaphorical clean sheet of paper and ask–if I were constructing a portfolio today from a pile of cash, what would I do.

I’m off to babysitting. More after Thanksgiving.

ARK invest

I’m writing this because I’ve mentioned ARK invest favorably in past posts. My family and I own several of the company’s actively managed ETFs. I have no other interest in ARK. In fact, I was skeptical at first that Cathie Wood, the CIO, who came from Bernstein, a deep value organization, could be successful as a growth investor. It turns out she can.

Ark’s focus is on disruptive growth. The ETFs are highly concentrated. Each holds around 30 names (compared with 50 for a typical growth investor and maybe 200 for a true value investor). The top five names may be a quarter of the fund. There are key stocks like Square that can be large positions in several funds.

Yes, the ETFs are risky. But they’ve been ideal for the economic environment of the past few years, with an incompetent Washington dismantling the profits of traditional industry. Their performance has been through the roof. Some years ago, when I tried to buy them in my Merrill Edge account, Merrill refused to do the trades, saying the ETFs were too risky (i.e., illiquid). Now, however, ARK’s assets under management are about $30 billion. It collects a management fee of 0.75%. According to Forbes, Wood, 64, has a net worth of $250 million, principally, (if not entirely) from her majority ownership of the firm.

I don’t mean this to be a commercial for ARK, though.

A short while ago, ARK announced it was soliciting proposals to replace its current ETF distributor, Resolute Investment Distributors. Three days later, Resolute, already a minority holder, announced it intended to exercise an option it has had since becoming ARK’s distributor in 2016, that would make it the majority owner of ARK. Wood, the current majority owner, with a reported 50% – 75% interest, is “disappointed.”

Details aren’t available. An article in Barrons is the best I’ve seen.

In a perfect world, what we’re learning about is the opening act in a negotiation about the future division of profits. I don’t imagine either side thought they’d be talking about how to split a $225 million/year pie, so there would appear to be plenty of money to satisfy everyone.

On the other hand, people aren’t always rational. Ego often gets seriously in the way. The fact that the negotiation appears to be happening in public rather than behind closed doors suggests that not all is well in the business relationship between Resolute and ARK.

My experience is that a well-constructed portfolio can manage on its own for maybe a year. So I don’t think there’s need for immediate action. There may be legal or contractual impediments to either side taking drastic measures. We just don’t know. Still, this developing story is something to keep an eye on.

pushing back eventual recovery in the US

Rivulets of brownish hair dye running down both sides of Guiliani’s face (‘Guiliani melting’) is the visual most in the news yesterday. Less obvious has been the stunning absence of any knowledge or skill in his recent court appearances. What I take from this is that no competent lawyer wants to be associated with Trump’s attempt to subvert the election process.

At the same time, Trump’s major priorities during his final weeks in office seems to be: spinning new conspiracy theories to aid in fund raising to fleece his supporters one more time; continuing to ignore the pandemic; and firing as many competent civil servants as he can–all, it would seem to me, to make things as difficult as he can for Biden. In other words, vintage Trump.

So, yes, we’ll have vaccines very soon. But no government work will be done for the next three months on how to get 600+ million doses distributed and administered. So recovery, which should also be just around the corner, will be, say, six months later in the US than elsewhere.

The stock market is absorbing all this negative news, not by declining–so far, at least–but by shifting back from emphasizing cyclical recovery to favoring pandemic beneficiaries. My guess is that this may continue through yearend.

a strange but telling 48 hours

It started when China unveiled its version of the Trans Pacific Partnership on Monday. Trump pulled out of the original TPP, a US-led coalition formed to check the influence of China in Pacific trade, when he became president. That (senseless, in my view) move put the US at a disadvantage in trade with the Pacific. Now the situation is worse for us, with the new coalition being formed by China to limit the influence of the US.

The pandemic is worsening in the US, threatening again to overwhelm hospitals’ ability to treat the infected. Two causes: colder weather, and Trump urging followers not to take elementary safety precautions. Continuing silence from Trump, however, including denying Biden’s transition team access to virus-related planning data.

Two low-level Republican officials in Wayne County, Michigan refused to certify election votes in the predominantly black city of Detroit–which had voted heavily in favor of Biden–while okaying them in predominantly white nearby towns. No credible reason why, except maybe that they were lauded by Trump for doing so. After three hours of non-stop criticism on the county Zoom call, the two reversed their stand and certified the ballots.

What to make of all this? For stock market investors, it’s that Trump continues to wreak economic havoc even in his final days in office. This implies to me that interest rates will stay near zero for longer than the consensus expects.

PS: less surprising, Trump fired the Homeland Security official who was responsible for election cybersecurity said the recent election was the most secure from cyberthreats ever.