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.

2 responses

  1. You seem intelligent until you open your mouth with your idiotic Trump comments time and time again. If you really want to make this blog work, because you have a lot of good insight, keep your childish feelings to yourself. We hear enough of this crap from the so called media, we don’t need to hear it from a SELF SUBSCRIBED e-newsletter as well. We get where you stand. Let it go now.

    Sent from my iPhone


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