yearend housecleaning

Monday and Tuesday were really ugly.

We’re maybe three weeks ahead of the mid-December exodus of professional money managers from their offices to wherever they’re going to spend the holidays. So right now is the last chance they have to tune their portfolios before leaving. This tweaking–for some, major surgery may be a more apt description–has two purposes:

–to set the portfolio up for success in 2022, and/or

–to try to add some extra short-term oomph for 2021 (usually a pretty stupid move) to steer the portfolio either away from the bottom of the pile or into the absolute top.

In all likelihood, 2022 will shape up to be very different from 2021, in my view. That’s because, rather than adding extra economic stimulus, world governments will be stating to withdraw it. In its simplest terms, this means interest rates (and bond yields) will begin to rise. The big uncertainty for next year is not whether rates will rise but how soon and by how much.

Two consequences for the stock market:

–investors will put more weight on valuation of a stock rather than relying mostly on its conceptual story, and

–cyclical recovery stocks, particularly as/when current shortages begin to abate, will likely give secular growth names a run for their money for the first time since 2019.

I have no idea what the trigger for the current selling was. It might have been AI concluding that this year’s stars had risen too far. Or it could have been a large institutional investor having a wretched year deciding to fundamentally revamp holdings.

what to do

A time like this is a good opportunity to see whether your view of the way the market is going can hold up during stress.

For example, if you think, as I have for a while, that stay-at-home stocks are no longer attractive, it will be instructive to see how far they fall and how well/poorly they bounce back when the selling pressure declines. For example, even though Peloton (PTON) has been pummeled this year, it’s down this week by about 8% through the early afternoon today vs. a fall of about 2% for the NASDAQ. Shopify (SHOP), on the other hand, is down by 3%. That’s roughly the same as rival AMZN, even though SHOP has been a much better performer ytd. ROBLOX (RBLX), which has been on a tear since reporting 3Q21 earnings (don’t ask me why, since 1Q and 2Q earnings were also just as good) is off by about 7% since last Friday. On the other hand, it was up by 60%+ mtd through Friday and is up by almost 9% as I’m writing this.

Another thing to do is bargain hunt.

Maybe the most important thing is to try not to mess up a good portfolio by making ill thought out moves.

One response

  1. I’m not confident that the supply chain shortages will abate any time soon. Companies that have beat Wall Street’s estimates have seen their stocks decline because of the longer term forecast that labor and supply shortages will continue to affect the bottom line through 2022.

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