toing and froing

Over the past half year, and accelerating my pace after the election, I’ve been shifting my portfolio away from what I thought of as “capital flight” mode to prepare for a return to post-pandemic normality. Put another way, I’ve shifted about a third of its assets away from tech-oriented multinationals toward consumer-oriented domestic firms. My initial motivation was the yawning valuation discrepancy between the two groups, and the inevitability of a counter-trend rally at some point. But the rocket ship ride the Russell 2000 began in early November urged me to pick up my pace.

Arguably–and if one believes that the new normal will be a duplicate (I almost wrote carbon copy, but who knows any more what that is) of the old (which I don’t)–a third isn’t enough. In any event, however, this is where I am.

I think I’ve done enough to avoid the worst of the damage the former portfolio structure would have undergone so far this year. And at this point I’d like to see more economic and company data before I switch things up again.

What I want to point out today is the almost daily to and fro pattern of current trading. Every day I click the button that sorts my holdings by that day’s performance. Recently, the greens are either virtually all my older holdings or all my reopening stocks; the reds are the other group. As likely as not, the next day the positions have reversed.

What does this mean?

I think the market as a whole is doing what I am–waiting for more information. This could go on for weeks, although I don’t think we’re in the end game of the transition away from what worked last year.

That’s because I don’t think we’re finished with interest rate increases, and we won’t be until there’s a real yield available from fixed income. How so? I can’t believe people will continue to be so crazy as to lend money, even to the government, knowing they’ll get less back after inflation than they lent.

The 10-year Treasury is at 1.67% as I’m writing this. I think we have to get to 1.80%, where it was pre-pandemic, before the equity market sailing gets smoother. Even then, we may not be seeing an adequate real yield.

For anyone who’s involved with a portfolio every day, as I am, there are a few things to do during this sideways movement. One is to consider whether you’re content with the current mix of secular growth and business cycle sensitives in your portfolio. For myself, I’m happy where I am, although I know any move should be toward more business cycle sensitives. A second is to look at the reds and greens for outliers–stocks that you conceive to be secular growth but which always line up with the business cycle sensitives, or the other way around. I’ve just found one of these that I’ve misconceived–and which I somehow have lost money on in an up market since I bought it. Out that one goes. A third is to consider whether you have your biggest weightings in your highest conviction stocks. If not, why not? This relative calm is the perfect time to fix this.

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