First of all, Happy New Year!!!
As I’m writing this on Tuesday morning, the S&P is up, year to date, by about by 24%. NASDAQ is ahead by about 30%. The Dow Industrials, a sad remnant of the cutting-edge investment tools of the 19th century, has advanced by about 13%–and that’s despite the best efforts of owner S&P to rejigger it to better track the more relevant indices.
This will be a tough act to follow. I’ve been told I say this every year, however.
I think that in the world there are three significant wild cards:
–I read the market as saying that although AI is an important area, the front line stocks (think: NVDA) are at relatively high valuations. This is why the market jumped all over Broadcom (AVGO) when it opined that it thinks it will sell mountains of stuff to AI firms over the next few years. I think 2025 will be a classic struggle here between concept and valuation. My guess is that valuation will win out, for a while at least, but…
–China. A big mess, caused partly by Xi channeling his inner Mao to suppress non-Communist Party entrepreneurs. There’s also the collapse of the real estate bubble fueled by Party manipulation and real estate’s role as a substitute for the banks that most people deeply distrust as a place to safely store wealth.
All this has had negative consequences for products being sold into this gigantic market–like clothing, luxury goods, wine and spirits…
The key question is when/how we bottom–again with potentially important consequences for stock markets in the US and Europe
–Trump. If we take Biden as an example, we should probably conclude that the extent Trump’s cognitive decline is pretty deep but has been covered up by his subordinates. I’m not sure whether that’s good or bad. What is the influence of Elon Musk, whose Tesla business in the US faces the threat of Chinese imports? His Chinese Tesla business could face sanctions there if a Trump-led trade war develops. Will there be mass deportations of workers and their families? Tariffs? the government deficit?
My personal investment experience is that about half of my outperformance (if any) vs. the S&P comes from sector/industry selection and half from individual stocks. My inclination today is to start out with no sector over/underweights and to keep a tighter rein than usual on individual position sizes.
One exception. I hold no oil and gas stocks (I think we’re at peak hydrocarbon use today and that anything Trump does will only drive output prices lower) and am overweight Utilities–all electric, all ETFs. These are both tiny sectors, so my overweight is in a technical sense very large but is maybe 5% of the portfolio. Unless oil prices double, my zero weighting won’t have much impact.
See you next year!!