reframing the question

I’m increasingly coming to believe that the growth/value distinction commonly used by market pundits is no longer relevant in today’s stock market. I don’t think that’s particularly surprising. The US economy has changed a lot over the ninety years since value investing was a novelty and the tenets of growth investing hadn’t yet been formulated. In addition, as in any other area, professional money managers study each other very carefully and quickly add successful techniques to their repertoires. So applying them becomes a sine qua for simply continuing to be in the game rather than a differentiator between winners and also-rans.

To my mind, the biggest investment issues for us in 2021 are:

interest rates: the 10-year Treasury note was yielding around 1.9% in late 2019. Yields fell a bit to around 1.8% in 1Q20, as the first worries about the pandemic surfaced. A reasonable guess (actually, my guess) is that yields will return to the pre-pandemic level as reopening gathers steam. So far in 2021 we’ve moved from 0.9% to 1.75%. We’re at 1.7% now. In my view, rates are much more likely to go higher than lower. That’s not good for stocks in general as/when that happens, since one of the big alternatives, fixed income, becomes more attractive. Meme stocks and associated options, SPACs–the most speculative end of the market–would be most vulnerable. On the other hand, this is not the unadulterated negative it would be if rising rates were happening at the end of an economic upturn.

income taxes: Trump’s reduction of the top corporate Federal tax rate from 35% to 21% produced a 25% one-time jump in S&P 500 profits, all of which, I think, was discounted in 2017. It sounds like Biden will raise the top rate to 25%. This should cause about a 5% fall in after-tax profits. Arguably no big deal, especially during a general profit upturn. Biden, however, also wants to remove sweetheart tax breaks for industries like fossil fuels, something Trump promised but made no attempt to do. If Biden is successful, the profits of companies in affected industries would suffer.

More tomorrow.

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