thinking about a bull market end game

Historically, stock market returns around the world have averaged something like inflation + 6 percentage points annually. Bond markets, typically less risky, have returned inflation + 3 percentage points. Stocks tend to be much more of a roller-coaster ride than bonds, though, mostly because they’re driven much more strongly by the ups and downs of the business cycle than fixed income.

Given this role of thumb, the US equity returns over the past 12 months have been startlingly good:

ARK Genomics ETF +228%

ARK Innovation ETF +177%


Russell 2000 +30%

S&P 500 +17%

Dow Jones Industrials +7%.

(To underline the obvious: the Dow is loaded up with very mature companies and is not really relevant; the R2000, made up of US economy-linked, mid-cap stocks, has made all its gains–and then some–since Trump’s election defeat.)

The returns since 1/1/19 have been just as eye-popping:

ARKG +338%

ARKK +280%

NASDAQ +110%

R2000 +57%

S&P 500 +52%

DJI +32%.

As I see it, the two broad story lines behind this strong preference for secular growth names have been:

–the economic incompetence of the Trump administration, and

–Trump’s position that the pandemic is a hoax, and his resulting demonizing of any effort to halt its spread.

Trump is now out of office, his attempt at violent overthrow of the election results having failed. Biden has been inaugurated. So the clock is ticking down on these two drivers.

Perhaps just as important, the gigantic spread between winners and losers in the raw numbers themselves argues that a rotation away from today’s leaders must be on the way. And, of course, there are both institutional (e.g., SPACs) and individual (Robinhood) signs of speculative froth that typically signal a market top.

I’ve been taking the strength of the R2000 since the election as an important sign that this rotation is finally underway. Since January 6th, however, the R2000 has lost relative steam to NASDAQ. The main reason, I think, is that the market is learning that the pandemic is worse than feared and that Washington has done far less than advertised to combat it–both implying that interest rates will stay lower for longer. Republican politicians are also currently mulling over whether they’re in the party of Trump/Putin or of Lincoln–early signs seem to indicate they prefer the former. If so, this would likely mean no resumption of foreign direct investment here and a continuation of the slow repositioning of multinationals away from here, despite the large domestic market and the availability of skilled workers at reasonable cost.

As a citizen I find it frightening that the Senate may choose to let the Capitol coup attempt go unpunished. The US starts to look like fallen angels Boeing or Intel writ large. As an investor concerned with short-term market rotation, however, I think interest rates are much more important.

Tomorrow, a look at 1989 Japan (the closest analog I see to the US today) and 2000 US.

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