heading into 2021 without a clear roadmap

That’s the way I feel, anyway.

On the one hand, I think most stock market participants are still substantially underestimating how much economic harm Trump has caused during his term in office. Three key aspects of the last four years: support for the industries of the Fifties while putting roadblocks in front of cutting-edge consumer and industrial companies; his thoroughly debunked, deeply damaging 18th-century approach to trade, especially with China; the extra trillions of dollars in government spending needed to recover from his “it’s a hoax” justification for inciting Americans not to take pandemic defense measures.

In more qualitative terms, his white racism and his continuing attempt to subvert the November election–checked not by Washington but by the courts, the military and local election officials–have given the American brand a black eye that only time will heal.

2021 issues, as I see them

Given a chance, the likelihood that most people will get vaccinated, the arrival of warm weather, and perhaps some help from the new administration (I’m only figuring he rolls back the regulatory clock to 2016, though), the economy should begin to heal itself.

Two traditional investment questions for a time like this are: how vigorous any rebound will be and when it will begin. The when is important because the stock market typically reacts six months or so in advance of changes in economic strength. The how vigorous is important because 50% or so of the earnings of the S&P come from the US, with 25% from Europe, 15% from developed countries in the Pacific and 10% from emerging markets. Does it make much difference if we bet on the US or the rest of the world in the stocks we choose?

A related issue is how powerful any business cycle upturn will be when compared with secular growth momentum for areas like IT, genomics and fintech. In other words, how heavily should we want to be exposed to a traditional business cycle rebound.

Of course, price also enters into the portfolio construction equation. That’s particularly important today, I think.

a non-issue for now…

…is interest rates. Demand for stocks is a derived demand. The more fundamental demand is for liquid investments–stocks, bonds or cash. I don’t think rates are going lower. I don’t expect them to move higher for a considerable amount of time. But as/when rates start to rise, cash will likely become more attractive vs. both bonds and stocks.

a potentially important one…

…the dollar. The dollar has dropped by 5% or more against other major currencies over the past half year. I have no idea where the dollar goes from here. If the big global banks begin to think there’s a risk the US will have trouble repaying government debt, the direction is down. If Biden proves to be better than just not-Trump, the direction will likely be mildly up. The first case is good for companies with non-$US earnings, the second for companies with costs abroad and sales in the US.

relative performance, ytd

When I was working I used to get a daily performance attribution report, that detailed (more or less accurately) how every stock in each of my portfolios had performed the previous day according to a whole bunch of metrics, including what contribution each had made to aggregate out/underperformance. That, of course, was overkill. I mention this only because I have to generate all the information myself if I want to see it. So I end up being surprised every once in a while by very near-term wiggles in the US indices. I’m not 100% sure what to make of the data below, but here it is:

ytd 1/1 to election election to 12/22

NASDAQ +42.7% +29.6% +14.2%

Russell 2000 +18.1% -0.3% +23.3%

S&P 500 +14.1% +9.0% +9.4%

Dow +5.2% -0.3% +9.2%.

Significance? The NASDAQ is full of techy multinationals; the R2000 is full of companies that make things in the US to serve US customers. The Dow is pretty worthless as an index, although there still are enough dinosaurs in there to give an indication of how the lagging edge of the economy is doing.

As I read the numbers, Wall Street is already beginning to bet on a domestic cyclical rebound. Regular readers will know I’ve been looking for this for maybe half a year. There have been fits and starts before, but nothing as strong as during the past six weeks or so. I’d already shifted about 20% of my portfolio into R2000-ish names, with indifferent success. I certainly won’t pare back but I have to think about how much more to boost this.

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