I’ve spent the past few days tying myself into knots in an unsuccessful attempt to articulate a coherent overall portfolio strategy.

The main near-term issues I think the stock market is facing are:

–recovery from the pandemic

–raising interest rates back to normal from their emergency lows of the past couple of years

–how persistent inflation will be

–the extent of reshoring industries outsourced to the developing world

–the war in Ukraine

–changes in the market’s discounting mechanism

–factor investing

–relevance of toxic politics.

Taking these in order:

–it seems to me that when the new administration shifted from pandemic denial to pandemic cure, the US has moved into the forefront of the back-to-normal movement. The past year has been all about separating purely stay-at-home beneficiaries (bad) from winners from pandemic-induced lifestyle changes (good). I expect this will continue, with new questions, like the value of midtown office space, coming to the fore

–I’m thinking the 10-year Treasury will end up somewhere around 4.0%, with the Fed Funds rate at 3.0%. This implies that inflation will settle in around 3%.

The 10-year is now yielding about 2.7%, up from 1.5% last December. So we’re basically halfway there. A consensus seems to be building that the US stock market made an important low about a month ago. But because the stock market continues to react negatively to any move higher in Treasury yields (despite the overall plan being pretty well known), it seems unlikely to me that stocks will run away to the upside

–I think the important inflation question is not about the current yoy price rise numbers but what the yoy figures will look like this time in 2023. My guess is that most supply chain issues will have disappeared by then. Two possible exceptions: semiconductors and, depending on how the war in Ukraine goes, oil. If this is correct, worries about a 1970s-style inflationary spiral as misplaced

–I think the biggest reshoring industry will be semiconductors, whose repositioning and capacity enlargement will go on for years. I think the largest response to higher oil prices will be intensification of the move to renewables

–the war in Ukraine. This is a major wild card. It seems to me that other than Russian oil, the world will find substitutes for the region’s exports relatively quickly. To me, the imponderables are whether Russian will escalate a conflict it appears to be losing and what their support of Putin will mean for the anti-growth political agenda of MAGA Republicans in the US.

more tomorrow, I hope