imagining the rest of 2021 (ii)

More a side note than anything else, the top countries by percent of population having received at least one vaccine dose are:

Israel 60%+

UK 50%-

Chile 40%+

US 40%

Canada ~25%

EU 20%-

Mexico 10%-

the world in total ~5%.

Two implications:

–there’s probably a lot of substance to anecdotal reports that reopening in the US is happening sooner and at a faster pace than the consensus expects, and

–the still vast pool of unvaccinated people around the world suggests that the threat of new variants is not going to go away any time soon. This may simply mean annual booster shots will be needed for a long time, or it could be something more dangerous. In either case, my guess is that this will not be a front-of-mind issue for the US stock market for a long while. Still, I have to remember this as an assumption in formulating a market strategy.

setting expectations

One of my earliest stock market mentors, Denis, a very careful investor, told me he thought a careful analyst of companies, putting in a reasonable amount of effort studying a small number of companies, could achieve a 20% return most years in the stock market. Stress careful and effort and I think this is a reasonable expectation. Can I do this? Not every year. I’m not very good at detecting market tops, so I end up with higher highs and lower lows.

If we look over long periods of time and in stock markets around the world, indices seem to average gains of inflation + 6 percentage points a year. Gains aren’t steady, though. A typical pattern by year might be +10%, +10%, +10%, -12%, the last being a recession–which sets the stage for the pattern to repeat.

My point: 2020 was an extremely unusual year that we shouldn’t generalize from. The salient question from 2020 for us today is how we deal with the unwinding of the extraordinary measures (e.g., near-zero interest rates) needed to deal with the pandemic and the retrograde social/economic policies of the Trump administration causing firms to prepare to leave the country. Bad for the US but extraordinary for the stock market, especially stay at home and capital flight stocks.

Take the extreme example of the ARK funds. The flagship, AARK, was up by about 160% in 2020. Breakeven would, to my mind, be a laudable result for 2021. I’m sure the managers intend to do better, maybe much better, but really…

themes?

end to lockdown

The typical stock market pattern during a business cycle shift from recession to expansion is for the most highly cyclical stocks–mining, farming, construction, autos, hotels, airlines–to move, as a group and very early in recovery, purely on the idea or concept of recovery itself. They then tend to move sideways until the actual recovery begins. Then the group gets sorted out, moving up/down depending on their actual experience.

I think we’ve entered the second phase. The biggest question marks that are arising have to do with travel stocks, i.e., airlines, cruise ships and hotels. How much and how quickly is business travel–repeat customers who pay full price for deluxe treatment–going to recover? What about affluent senior citizens going on international cruise vacations?

What makes this a key issue is that travel industry firms tend to have a high degree of operating leverage, that is, they may need 60%/70% of their seats/cabins/rooms filled in order to break even. United Airlines (UAL) went from $25 to $60 on the concept of an eventual return to the friendly skies. Only recently, however, has the market’s attention turned to the thorny issue of how to achieve, say, 80% occupancy while maintaining social distancing.

more tomorrow

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