It seems to me that the most remarkable aspects of Trump’s first term were:

–per-capita, deaths in the US from the pandemic were 2.5x the deaths in Canada, our neighbor to the north, and worse than anywhere on earth other than Peru, according to a Johns Hopkins list ; and

–after he lost the 2020 election to Biden, Trump supporters stormed the Capitol as part of a violent plot, approved by if not hatched by Trump himself, to keep him in office.

Over the four years of Trump’s first term, the S&P 500 rose by about 60%, the lion’s share of that in response to a substantial profit boost driven by a cut in the Federal corporate income tax rate in 2018. This was a good thing, in my view, because it brought US taxes more in line with the rest of the world, thereby stemming the movement of corporate headquarters out of the country.

So far today (I’m writing the night of the inauguration), Trump has reportedly pardoned almost all of those who stormed the Capitol to prevent the results of the last election, in which Biden defeated Trump, from being ratified (implicitly conceding, I think, his role in their actions, as well as removing any motivation to testify against him). He’s commuted the jail sentences of the rest. In addition, on his orders, the US has joined Iran, Libya and Yemen as non-members of the Paris Accords combating global warming. Tariffs are in the offing, as well, although exactly how is not clear.

I find it difficult to draw stock market conclusions from the fact of Trump’s victory. I have two general ideas, the first of which won’t affect strategy by much.

–my guess is that “drill, baby, drill” will have little direct impact on the world oil price. That’s because global supply and demand for crude is very finely balanced. Even a 1% increase in supply could easily mean a 10% drop in the benchmark price. We may already be in a modest oversupply position now, since there hasn’t been the usual a heat-season spike so far this winter–and we’re just about past the point where refining more heating oil would make sense. My conclusion is that the profit-maximizing strategy for the oil majors today is not to bring on more capacity and maybe even to shut wells in so as to reduce supply to support the current price.

Looking at this from a stock market perspective, Energy is pretty much the smallest sector in the S&P 500, at about 4% of the total market cap. Given the general goal of beating the S&P, for professional portfolio managers, having a strong opinion about oil, positive or negative, isn’t essential to success in the way it was a generation ago.

–my hunch is that Elon Musk is very eager to prevent cheap, efficient EVs made in Mexico by BYD (or other Chinese firms) from entering the US and doing to Tesla what the Japanese automakers did to GM and Ford in the 1970s. If so, he would be a substantial beneficiary of tariffs imposed on imports from Mexico. And he has Trump’s ear. In any event, even though throughout history tariffs have generally worked out badly for all parties involved–especially so for countries that impose them–we may see them early in the Trump administration. That would likely end up depressing overall domestic economic activity …and would suggest tilting a portfolio toward multinationals and away from purely domestic firms.

It’s early days, though, and probably not the time to be super aggressive.

I regular reader asked me to write about how to benefit from the reshaping of the electricity generation business that is now going on because of the increasing demands for power from the fast-growing AI industry.

I have opinions, and I think I understand the main issues. But I should make it clear from the outset that during the almost five decades I’ve been involved with the stock market, utilities of all types in the US have generally been sub-par investments. So although I spent a few years early on analyzing natural gas utilities, I’m not an expert.

My overall conclusion, and what I personally have done, is to find an ETF that focuses on infrastructure for electricity-generation.

Details:

–no one wants five different water or gas or electricity companies to all be digging up the streets to lay delivery networks, most of which won’t be used very effectively. Instead, governments select one provider and require, in return for the monopoly they are allowing, that its charges be regulated by a municipal authority. Typically, the authority sets a maximum allowable annual return on the provider’s investment in plant and equipment. This return is collected as per unit charge added to amounts used by customers.

An example: a utility has plant and equipment of $1,000,000. The regulator allows a 5% annual return, or $50,000. The utility estimates it will deliver 100,000 units in the year ahead. So it adds $.50 to the cost of each unit. At the end of the year, the regulator and the utility reconcile the estimate with what has actually happened. If the utility has collected too little, it will be allowed to raise rates a bit to cover the shortfall. If it has collected too much, it has to lower prices.

–this is inherently a political process. As a result, when a service area is growing and demand for the utility’s output is expanding, the utility commission will most likely grant a generous return on plant. This makes it easier for the utility to raise capital to build out its network.

In contrast, when the area matures–and this has been the case for virtually all of the US for a long time–political mileage will only be made if the utility commission lowers the allowable return. As this occurs, the utility’s focus typically shifts to controlling its own costs. This can include stretching out maintenance schedules or having reciprocal agreements with neighboring utilities that allow each group member to trim full-time staff. Two worries here: customers may turn to other power sources (e.g., solar panels); or the utility may be sued if damage occurs from delivery systems not being properly maintained.

My overall reaction is that this electric utilities are an area I’m not wildly interested in and that there are also lots of ins and outs that can make a substantial difference in potential outcomes for superficially similar firms.

Two conclusions, for me:

–buy a bundle of utilities, not just one, and

–look for equipment suppliers.

Both of these argue, for me, that one should find an ETF, active or passive, depending on one’s risk preferences, that specializes in this area.

The S&P 500 is the most typically used benchmark to monitor performance of professional pms managing money invested in US stocks. The two chief alternatives are the NASDAQ, which has a stronger emphasis on technology than mainstream institutional clients might like, and the Dow Industrials, which has great retail name recognition but whose small size and eccentric method of calculating performance make it pretty much useless.

The S&P breaks out into 11 sectors. In descending order (as of 12/31/24), they are:

Information technology 32.5% of the index

Financials 13.6%

Consumer discretionary 11.3%

Healthcare 10.1%

Communication services 9.4%

Industrials 8.2%

Staples 5.5%

Energy 3.2%

Utilities 2.3%

Real estate 2.1%

Materials 1.9%.

grouping these by their sensitivity to the ups and downs of the economy (primarily the US but with a nod to overall world growth), from the most sensitive to the least:

most sensitive = 26.6%

Materials

Energy

Industrials

Consumer discretionary

Real estate

sensitive, but strong secular growth = 41.9%

Information technology

Communication services

less sensitive/more defensive = 31.5%

Financials

Staples

Utilities

Healthcare.

The index itself is also a tool that pms use to control their portfolio structure and to monitor how their ideas are working out.

There are many ways of doing this. They all involve intentional deviation from the structure of the index. At the most abstract level, one can shift sector weightings, based on high-level thoughts about how the world economy will likely play out. Same with industry and individual stock weightings. Or one can substitute names that are not in the index for part/all of names that are.

” Stock Z is cheap. Therefore, sooner or later, hopefully sooner, it will go up in price. So I’ll buy it now and make money by already being there when others discover the undervaluation and bid the price up.” This is absolute value investing. It’s about the intrinsic value of a firm’s assets and growth prospects, either in the hands of current management or, more often than one might think, with the idea that someone more capable will take over.

On the other hand,

” Stocks A and B are both in the Consumer Discretionary sector of the S&P 500, and each represents, say, 1% of the overall S&P 500 index. I think that A is cheaper than B, based on PE, earnings and/or assets, and also has better growth prospects. So I won’t hold any B and will instead have 2% of my portfolio in A. Other than this one difference, I’ll make my portfolio look exactly like the S&P.” If I’m correct in this judgment, my portfolio will outperform the S&P. This is relative value investing. (In the real world, I would do this with a number of individual names. I would most likely also over/underweight industries and sectors based on my assumptions about how the world economy is going to play out. In my own real-life active portfolio, for example, I own no oil and gas stocks at the moment.)

Framing this slightly differently, an absolute value investor is more highly convinced about what will happen and has less of an idea about when. In contrast, as earnings reports come, they will establish the correctness of believing in the superior growth of A and/or the turkeyishness of B. So the relative value investor is more highly certain of when the strength of A that he thinks will be revealed in earnings reports than what the actual revelation will be.

Relative value investing is what I mostly do, although I did spend a decade in an absolute value shop where I was the lone relative value voice. The main virtue of relative value, as I see it, is that the judgments I need to make are simpler. It’s usually much clearer that A is more attractive than B than whether either is good or bad in the absolute.

To some degree, however, my decision to buy A and not B can also be influenced by how I perceive macroeconomic conditions. I may, for example, choose to hold Walmart or dollar stores and not luxury goods firms if I think the economy is going to be weak, and dump the former for the latter if I think a strong upswing is likely.

What I’ve called absolute value investing is what is known in industry jargon as value investing. What I’ve been calling relative value is known as growth investing. There’s also a middle ground between the two called GARP (growth at a reasonable price).

Value investing came into prominence during the Great Depression of the 1930s, formulated by the father of value investing, Benjamin Graham. Until the 1970s it was the dominant method used by professional investors. It continues to work well today as a way of approaching special situations–think of Robinhood when it was trading at/below book value a year ago. But it hasn’t worked particularly well in the US stock market as an overall method during the last third of a century.

Growth stock investing has worked a lot better in the US, at least in part due to the explosive potential for earnings gains in the technology sector.

Note: S&P has “style” sub-indices that it labels Growth and Value, based on elements it perceives as the important characteristics of each investment style. Especially in the case of value stocks, it’s not clear to me that the Value sub-index matches up much with what a professional value investor might hold.

First of all, Happy New Year!!!

For us as investors, the gains of 2024–the second fabulous year in a row for most of us with holdings in the US stock market–are now in the rear view mirror. So our task is to blank those results out of our minds and plot a strategy for 2025 de novo.

As always, it’s important to remember that the key to stock market success is to know more than the consensus–i.e., a lot–about a few things rather than a little about a whole bunch of stuff. The latter is a recipe for investment disaster.

I’m not in a great rush to change my portfolio a lot. I’ve recently sold the last of my WMT, shifted about a third of my NVDA into AVGO and trimmed HOOD (I intend to sell more but want to scale up), but am content for now with the relatively aggressive (which is the norm for me) structure I have. I’ve added a few you-can’t-fall-off-the-floor names (one of which continues to plumb new lows). I believe I need to become more defensive, but want to see how the new administration is developing before I do so. For once, I think politics may matter, since what Trump talked about on the campaign trail is so economically toxic, in my view.

Stuff I’ve learned over the holidays:

–30% of Americans can only read at a 10-year-old level

–a large number of people who borrowed at variable rates, typically a credit card, during the pandemic are in real difficulty as rates have risen

–I stumbled into Pacific Basin stock markets in 1984 and took over a global portfolio in 1986. For the next 20+ years, global was the place to be. Then I retired. Since 2009, though, the US has been the only game in town, trouncing international markets year after year. Maybe it’s time to look abroad again. Japan?

–for all his talk, Trump was a deportation piker compared with his predecessors Obama and Bush. Even Biden accelerated deportations from the low level Trump left them when his coup attempt failed. This is the essence of my hesitancy to change my holdings. What will/can Trump do?

–Trump’s ultra-wealthy supporters are talking up the strong economic growth during the Gilded Age of the late nineteenth century, when tariffs were high, there was no income tax and unions were few and far between–and arguing we should adopt the same playbook. They ignore, however, the much higher economic growth of the post-WWII era, which featured much higher income tax rates and powerful unions.