taking out a fresh piece of paper

…or maybe “starting a new Word document,” or “taking a step back (to try to see the big picture)”.

My experience is that success in the stock market doesn’t necessarily come from knowing a lot of things–although a deep fund of general knowledge can’t hurt. Rather, it comes from knowing a few things much better and/or much earlier than most.

To my mind, stock market interest is now focused on two main topoics:

–the continuing rise in interest rates, and the associated topic–how high they need to get to rein in inflation. The yield on the 10-year has already risen from around 0.6% in mid-2020 to 4.2% last October. It’s now at 3.93% as I’m writing this. Let’s say that we end up at 4.2% again. One reason this yield is important is that it gives us a quick-and-dirty look at what the stock market PE (i.e.,1/earnings yield) should be. At 3.93%, the market PE should be 25.4x; at 4.2%, it should be 23.8x.

Slightly higher interest rates should imply somewhat slower spending, but the larger effect, I think, is that they also suggest about a 6% contraction in the market PE. Arguably, most or all of this will be offset by listed-company earnings growth. The timing of this offset is a matter of current debate

–the strength of earnings in 2023. I think there are two separate issues here. One is the strength of demand for goods and services in 2023. The second is what I suspect has been the very leisurely pace at which companies sold off excess stocks of stay-at-home goods last year–implying, I think, sales of this stuff in 2023 at lower prices. Why would a company act this way? …so executives would hit higher bonus levels. Why do I think this? …I’d be tempted to do the same and what I read as odd phrasings in earnings conference call transcripts.

My guess is that these topics have already been beaten to death by everyone except trading bots.

What I find more interesting:

–the FAANG companies that have dominated the US stock market over the past twenty years seem to me to be showing their advanced age. After all, growth stocks seem to me to last about five years before they have to reinvent themselves. Reinvention is difficult. Lots aren’t able to do this even once. But these companies have done so 2x or 3x …and, it seems to me, they’re all showing their age. Time to look for smaller, earlier-stage phenoms. In one sense, these are riskier than the behemoths because they’re less well-known, but the early 1970s show the high risk in hanging on to “one decision” stocks for too long

–banks are starting to put office building loans on credit watch, a result of changing work patterns post-pandemic. I’m not sure who benefits from this, but there must be someone. Suburban restaurant chains?

–a better than average, but not the best, human Go player beat a computer by making unusual moves that apparently distracted it. Are trading bots far behind?

Leave a Reply

%d bloggers like this: