In constructing a portfolio, or evaluating one that’s already build, there’s a pretty straightforward checklist I use:

–are things going to be better in the US or outside? Right now, I think the answer is pretty clearly in the US. So we should prefer stocks whose earnings come from the domestic economy rather than abroad.

–are we in an up-trending market (meaning an expanding economy, stable or falling interest rates) or a down-trending one (decelerating economy, rising rates)? Right now, the US economy is in pretty good shape, but the Federal Reserve is raising rates to slow things down. This second is the dominant market factor, so the answer is down-trending, with the footnote that maybe we’re bouncing along the bottom.

–are there any secular themes–positive or negative–that we should take account of? …examples from the recent past might be: cloud computing, e-commerce, electric vehicles…

In the current market, I can think of several:

–the shift in consumer behavior as the pandemic comes under control and the stay-at-home economy wanes

–the retreat from the extremes of globalization, sparked by worries over access to advanced computer ships made in Taiwan and the effects of the invasion of Ukraine on commodities industries like oil and gas, mining and agriculture

–the changes that AI-driven trading have made in the short-term risk profile of the stock market. As I see it, when a company reports negative news, the bid side of the market for the stock evaporates. A stock that might have lost, say, 10% of its value on the news in prior times now falls by a third or even half before buyers emerge. The result is that the risk/reward balance for many growth-oriented stocks is considerably less favorable than it has been in the past.

more tomorrow