Yes, we’re already almost a third through the year. But I’ve found this is a good thing to do no matter when. The goal is to get an insight or two into the economy of, say, six months from now, that will act like Archimedes’ lever. A starting point can be anything, however small, so long as it’s something you’re confident enough in to start to build an investment strategy around. Better if it’s something you don’t think the market realizes yet. At the very least, knowing that your investment plan depends on this lever, you know to continually check to see whether your idea is playing out and/or whether you still believe in it.

Although every year is its own thing and a little different from any other, 2021 is unusually weird.

Fiscal and monetary policy have been exceptionally loose, mostly to offset the pandemic although partly also to offset the drag from Trump’s economic blundering. We can see the purely financial market results of this looseness in sky-high PE multiples, in rampant speculation in SPACs and meme stocks and in ultra-low (not even compensating for inflation) fixed income yields. Current ructions in financial markets are being caused, I think, by investors beginning to factor into prices the idea that we’re past the peak of such stimulus. If so, the only pertinent questions are when, and how quickly, stimulus will be withdrawn.

I think of this as like being in a prime seat in the center of a movie theater and beginning to smell smoke. You know that sooner or later someone is going to yell “Fire!” and that by that time you’d better be much closer to the exit. But it’s such a good movie…

What’s different about today is that we’re at the beginning of a likely upsurge in post-pandemic corporate profits, rather than at the end, which is the usual situation when government stimulus is withdrawn. Its removal has two typical effects: higher interest rates and stock market PE contraction ( and usually on sagging earnings).

Higher rates, to my mind, mark the end of a 40+year trend of lower yields, which hit their low last summer. A reversal (meaning a new trend of rising rates)? Who knows. But higher rates are bad for bonds. PE contraction, similarly, is bad for stocks. But in the current situation, corporate profits are likely to be rising sharply at the same time. Finding areas where the offset of outsized earnings gains is going to be strongest, especially where they will be surprisingly strong, and/or areas where the market has already factored in a worse outcome than is likely–these are all places to look for stocks likely to outperform.

More tomorrow.