what to make of this week’s stock market

Lots of stuff has happened in a short period of time. Some of it is medical (vaccine test results), some political (Biden declared the next president; Trump refusing to concede; the world interpreting the latter, rightly or wrongly, as the start of an attempted coup), some economic (the resurgence of the virus, thanks in part to Trump superspreader rallies, forcing renewed business lockdowns; stock market yo-yoing).

Note: if I were a different person, or if I were still living in my hometown of Staten Island, I might not have the same list. But the welter itself would still be there.

Speaking as investors, it’s our job to filter information from noise strictly from an economic point of view.

While I suspect we will one day look back on the election as having spurred substantial economic and social changes in the US, it’s near-term result will be to remove a self-destructive economic illiterate from the White House. It’s not clear, though, how much better off the US will be, other than that–a year too late–we’ll finally admit the pandemic is a problem and try to control it.

But that’s mostly noise for now, I think.

The real information from this week, as I see it, is that it gives us a clue as to what will happen as the coronavirus comes under control and as Trump’s economy-slowing tariff and immigration policies are reversed. In particular:

–when the market senses the start of an economic upturn, stocks that investors have left for dead have an extraordinary resurgence. This is all about the idea that equity holders won’t be wiped out, that chances for survival have gone from zero to, say, 50%. This means a long-dated option on recovery, which is arguably all the stock is at the bottom, is worth a lot more than it was before. Airlines and cruise ships come to mind.

I think economic good news is too far down the road for the kind of rally we saw on Monday and Tuesday to be sustained. But studying those two days will give us an idea of the kinds of stocks that will do well and those that won’t

–former winners become losers, many times violently so, as economic interest shifts. Given the extreme outperformance of what I’ve been calling “capital flight” stocks, the ugliness of Monday/Tuesday losers shouldn’t be surprising. But growth stock investors are by nature optimists, so it’s good to have a reminder. For me, as an example. I’d moved a quarter of my most aggressive portfolio out of cf stocks into consumer discretionary + a Russell 2000 etf. That didn’t stop me from losing double the NASDAQ decline on those two days.

–the bounceback, if that’s what it turns out to be, on Wednesday and today will likely leave some former winners by the wayside. That will likely be another important indicator from Monday/Tuesday. Typically, a rebound during a transitional time like this will exclude the stocks investors, again rightly or wrongly, think are the least likely to prosper in a new, GDP growth-friendlier environment

What’s a little weird about this week is that my experience is that flashes of worry like Monday/Tuesday last longer than two days. So there may be more weakness to come. Still, I think what’s going on is more a minor relative valuation adjustment than a true change of direction.

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