I’ve been thinking a lot lately about the rotation now taking place in the US. It’s away from the winners of the past four+ years, by and large multinational firms with strong global growth prospects, toward more domestic-oriented firms with perhaps lesser prospects but much lower valuations. I think three factors are involved:

–Trump is gone. Whatever the opposite of an economic Midas touch is, his serial business failures and the mess of his four years as president suggest Donald Trump has it. During his time in office, the stocks of multinationals, as measured by the Russell 1000 Growth index, rose by 108%, as domestic equity investors sought to move their money as far away from the US economy as possible. In contrast, stocks whose fortunes Trump pledged to champion (and maybe did as well as he was able), as measured by the Russell 1000 Value index, advanced by 15%. The S&P 500, which is roughly 50/50 growth/value, was up by 58% over the same span.

The figures are directionally similar if we measure from the 2018 start of the lower domestic corporate tax regime, supposed to boost the prospects of domestic firms. Those figures are: Russell 1000 Growth = +55%; Russell 1000 Value = –3.5%; S&P 500 =+23%.

Since the 2020 election, when Trump checked out of the Oval Office to concentrate on trying to overturn his defeat, this trend appears to have reversed. The Russell 1000 Value is up 28% vs. a 20% gain for the Russell 1000 Growth. The S&P = +23%.

–The pandemic is coming under medical control. As the “it’s a hoax” narrative fades under the weight of 560,000 US deaths (a third more than all American combatants killed during WWII, and approaching the death toll–Union+ Confederate–of the Civil War), and as more Americans are vaccinated, the country is starting to open up again. Actual evidence of increasing demand (as opposed to anticipation) has begun to buoy retail, restaurant, vacation and entertainment names.

— +108% vs. +15% is a ridiculously large spread. At some point, short-term speculators would have to short the winners and buy the losers purely on the idea that the growth over value trend has gone too far too fast. Even if the longer-term growth trend is still intact, there has to be a period of catch up for the laggards.

One way of approaching this rotation is simply to ignore it, to hold your highest conviction names and take whatever bumps come down the road. It’s virtues are that it’s simple and that it’s not time-consuming.

A second, easier to do in a non-taxable account than a taxable one, is to make your holdings look more like the structure of the S&P 500. Last August, for example, I began to trim my tech holdings in my IRA and replace them with a Russell 2000 etf. I did this mostly on a valuation basis–the idea that nothing grows to the sky. I’ve gradually added reopening names, using a combination of more sales of winners and also some R2000 sales. I’m maybe 60% secular growth, 40% business cycle sensitives now. I’m trying to work out whether I should shift closer to 50/50. My hunch is that I’m not going to move back toward secular growth names, but I’m not 100% sure.

A third, more aggressive, move would be to turn sharply pro-cyclical, to, say, 60% business-cycle, 40% secular growth.

This last doesn’t appeal to me very much, mostly because I don’t have very high conviction that this is the right thing to do. Despite what I’ve been writing during the Trump years, I tend to try to avoid all-or-nothing bets. I can move in the cyclical direction, though, in two ways: by ensuring that I don’t have pure quarantine beneficiaries, and by finding stocks that have a combination of cyclical appeal and reasonable secular growth prospects.

More tomorrow.