what comes next (ii)

preliminaries:

–I’m not sure we have to decide anything immediately, even though my initial what comes next? post highlights an apparent change in market dynamics right after the election results became clear. That’s because nothing much happens in the stock market during a typical December. For good or ill, portfolio managers have already cemented in through eleven months’ work their performance for the full year. There’s little they can do to alter the bonuses–or the potential pink slips–they’ll receive in their Christmas stockings. So there’s a tendency to coast, resting for the new year to come. Sunshine is in short supply in the northern hemisphere and stock trading volume tends to be light.

–We’re also in a peculiar time. Maybe it’s just me, but I think there’s genuinely deep uncertainty about what will happen next in the world. So PMs are likely figuring there’s no percentage right now in changing things up and building a strong new point of view into their holdings. All the more reason to try to figure things out before the crowd

the two key investment issues

They’re not exactly the same, but they’re related:

–given the immense (that’s probably too tame a word) outperformance this year of what I’ve been calling the capital flight trade vs. what could be dubbed the domestic GDP bet (represented by the Russell 2000), is there anything left to be gained by continuing to ride the pro-flight portfolio structure.

It’s important to understand that professional investors who serve third-party clients never intend to have the kind of year that has been there for the taking in 2020. As one of my first bosses often said, “The pain of underperformance last long after the glow of outperformance has faded.” In more concrete language, if you take enough risk (meaning create a portfolio different enough from your benchmark index) to possibly outperform by five percentage points and underperform by five two years in a row instead (maybe even one year), you’ll lose a ton of clients. If you aim to outperform by one percentage point and come up one percent short, no one will care. This means pros are just itching to rotate their portfolios. They just can’t figure out where to go …yet!

–how much and how soon can Biden have a positive effect on the trajectory of the US economy? My hunch is that this will be stronger and faster than the consensus expects. It’s not that I’m particularly a Biden fan or that I have much faith in the Democrats on economic issues. It’s that I think we impute wisdom and benevolence to whoever occupies the Oval Office. When the president speaks we unconsciously hear the voices of Washington, Lincoln, Roosevelt, Eisenhower, Kennedy, Reagan… We’re influenced by our respect for these past leaders, even when the message is racial hatred or science denial that we would dismiss out of hand if we heard it elsewhere. If this is right, Biden doesn’t have to actually do very much to have a positive impact on the domestic economy.

Again, if so, the real question is when the R2000 starts to look better.

More tomorrow.

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