This is incredibly simple-sounding, but investing isn’t rocket science and 40+ years of active US market experience (admittedly, I didn’t pay much attention during the Asia boom of the 1980s) says to me that it has some merit: stocks either go up or go down.

They don’t often just stay in place and do nothing. The current US market is telling me that domestic stocks don’t really want to go up. So… they’re beginning to go down. Not clear how far or for how long, but down is the flavor of the moment. So this is a time to trim positions that have needed trimming and to pick (lower) prices to buy things we like but have judged were too expensive. A less risky approach is to try to ferret out the inevitable clunkers you eye skips over when looking at performance figures and just swap into something better, rather than holding cash and trying to time the market.

I find it interesting that other markets, especially ones in Asia, are not following suit so far. My guess is that, unlike the case in the past, global investors are not going think of a US correction as a great chance to shift their portfolio structure toward the S&P–the big AI NASDAQ stocks, maybe, but nothing else. This even though the US has been the worst-performing major stock market in the world this year. Toxic, anti-growth domestic government economic policy is the reasonfor the relative decline, in my view. (Things don’t look as bad domestically as they really are because the currency has fallen through the floor since the inauguration. In dollar terms, the S&P is ahead by +15% ytd, EAFE by +27%.)

Two aspects:

–ICE is using armed masked men to arrest, imprison and deport Hispanic workers, with, if press reports are accurate, little regard for whether they are citizens, or legal immigrants, or not. Again, these are people likely to spend most of that they earn. So, the reputational damage to the US aside, ICE is shrinking domestic GDP.

–at Trump’s direction, Washington is shifting the flow of government payments away from the less well off, who are most likely to spend, to the ultrarich, who are much more likely to dump the funds into their Scrooge McDuck money pits. Today’s earnings miss by Disney may be a concrete early sign of the economic damage this anti-growth policy is doing.

Yes, this is Trump’s economic plan, if plan is actually the right word. …the plan a majority of American voters approved during the presidential election. But if media reports are to be believed, over the past months Trump has already traveled pretty far down the dementia trail broken by Biden, with actual policy now being directed by minions who, unsupervised, are giving it some extra oomph. And the presidential platform itself is much more economically (and socially) toxic than I think voters understood. To my mind, and increasingly the opinion of a majority of Americans, l think, the biggest problem is the willingness of Congress to stand by and watch the shining city being torn down.

sorting out parameters

discounting

This is the traditional–and also the important and correct, in my view–investing idea that the current stock price already contains the overall stock market’s assumptions about what future profits will likely be. This is what the current share price reveals or, in market parlance, “discounts.”

Put in a more academic way, the current price expresses the consensus view of the value today of the sum of all anticipated future profits.

The number isn’t a constant. Different analysts–meaning you and me and people doing these projections for investment firms–will have different ideas about how fast profits are growing and/or how long the period of unusually high profit growth will continue (the general idea is right, I think, but the (deeply flawed) academic assumption here is that a stock is a funny kind of bond–and that, therefore, nothing can go wrong with profit projections. That’s academic finance for you.).

Probably more important for us now, in bull markets analysts tend to want to incorporate, say, five years of future profit gains into today’s price; in plain vanilla bear markets, that may shrink to one or two years; at the bottom in the worst bear markets, analysts may haircut even that. (Note: during the Great Depression of the 1930s, stocks traded at discounts to the net cash on the balance sheets, spawning Benjamin Graham’s idea that it made no sense to do anything else but look for the biggest discounts. Up until maybe thirty years ago, such asset-based “value” investing was the primary tool for professionals. Still a usable approach–think HOOD 18 months ago or almost any stock at the low point in any bear market–although in today’s world broad application of this technique is a bit like bringing a knife to a gunfight, as they say.

where we are now

two aspects:

–the domestic economy. …a squishy concept as far as stock selection goes. For S&P 500 stocks overall, the traditional guess is that maybe half of total revenues come from abroad. My sense is that this figure is too low. Yes, the amount of foreign sales and profits are required 10-K disclosures, but I think that for competitive reasons (tax, too) companies say as little as possible–and frame what they do reveal artfully enough to limit its usefulness.

Nevertheless, whatever its limitations, I think the foreign sales figure is particularly important for stocks today. Washington appears to me to be, wittingly or not, opposed to two of the main drivers of GDP expansion–education and working population growth. In addition, the world believes that the administration intends to “solve” the problem of federal government debt by devaluing the dollar and/or that its intention to undo the Federal Reserve reforms enacted by Carter/Reagan will create another inflation disaster on par with that of the 1970s.

Because of both these forces, the ideal portfolio positioning (as well as the clear winner in 2025) continues to be multinationals with costs in US dollars and significant revenues elsewhere. Multinational software firms continue to be, I think, the most obvious beneficiaries.

At some point, however, there will likely be a counter-trend rally. There always is, based on relative valuation. The big questions for us are whether and how to play it, whenever it occurs, and how much to do in advance. Absent some dramatic change in Washington, however, the longer-term bet seems to me to continue to be for US-based multinationals (and China-based multinationals) to remain strong and the US economy to remain weak.

–the domestic stock market. It’s looking toppy to me. In particular, there seems to be a slow-motion rotation internally in the S&P 500 away from growth stocks and toward more defensive value names. I’ve been making the same kind of shift with my own portfolio over the past couple of months. My own reason is that I’ve had an unusually good year so far and want to lock in performance by looking a bit more like the index. I presume that growth managers are generally doing the same kind of “look like the index” maneuvering this way near year-end in order to lock in performance bonuses. If so, the value rally won’t last far into 2026.

However, one of my nephews pointed me to a chart complied by Justin Wolfers, a Michigan U. economist, that shows that from a group of 23 countries with national stock markets, the US ranks #20, year to date (as of 11/7), beating out only Denmark, New Zealand and Australia. Talk about lame performance. Ten on the list have double the return of the US. Even perennial laggards like the UK and Japan, whose pre-Trump economies made ours look like a super dynamo, have lapped us. Of course, the collapse of the dollar has something to do with this, although Hong Kong, whose currency is pegged to the greenback, is up by +41%.

…all in all…

If I were still working, I’d be tempted to raise 10% cash by trimming everything by that amount. Long experience tells me, though, that this would make me feel good but have no other significant effect. So my best course, I think, is not to touch much of anything and spend my time researching Hong Kong, Japan and China to add exposure there, funding it through trimming my largest US positions.

It’s all about pensions.

A generation or two ago, governments and private companies both offered what became known as defined benefit pension programs. Although there were lots of bells and whistles, basically an employee who qualified for a pension was paid a specified percentage of his/her salary at retirement each year for the rest of the retiree’s life.

Two issues:

–this is expensive, so companies have to put lots of money aside to meet this obligation, and

–publicly-traded stocks are the bulk of these holdings. But although stocks are probably the highest earning assets, they don’t just lie there. They typically either go up a lot, or down a bunch. In the latter case, the company may be called on to add more assets to the plan, to ensure it’s about to meet all its retirement promises.

Because of this last, most companies have long since shifted to defined contribution plans, in which companies make periodic contributions to tax-deferred, employee-owned accounts (most often, employees can add something extra, too) while the employees are still working. At retirement, the employee gains control over the entire sum–and the employer’s obligation ends. Two pluses for the company: its total payments are probably smaller than with a defined benefit plan and there’s no risk that an ugly bear market will shrink the plan assets to the point that the firm has to chip in more.

The one exception to this is state and local governments, which continue, by and large, to offer defined benefit plans to employees. Employees want them and arguably accept lower salaries than they would if offered only defined contribution plans.

Two issues here:

–how to deal with the ups and downs of the stock market–specifically the appearance of underfunding at the bottom of a bear market, and

–how to generate better investment returns than stocks, if possible, in order to reduce the proportion of public funds being put aside to fund pensions.

The answer, if that’s the right word: private equity and private credit.

More tomorrow

My experience is that all equity portfolio managers are deeply superstitious. Maybe this is just generalizing from one instance, but I’m pretty sure that this is true–but not spoken about much.

Two reasons:

–we’re all like sailors in a small sailboat afloat in a gigantic ocean, in that there are so many factors that are not under our control, and

–generally speaking, the industry is ruthlessly efficient in eliminating non-performing managers. Yes, there are exceptions: a manager may have substantial gains while consistently underperforming in a raging bull market (think: Japan in the 1980s); or there’s the rare instance (I can only think of one) of a manager convincing his bosses to accept an inappropriate target index that virtually anyone can beat.

Mine is this: I don’t like to talk about my performance. Yes, I have to analyze it. But this year, so far, has been so unusual that I thought I’d take a look at how the world in general and the various sectors in the S&P have done so far this year–up until about noon EST today.

The year-to-date scoreboard:

Gold +52.5%

IT +29.8%

Communication services +25.4%

EAFE (Europe, Australia and the Far East) +24.0%

NASDAQ +21.7%

Utilities +17.5%

Industrials +17.1%

S&P 500 +16.5%

Euro/USD +10.4%

Mexican peso/USD +9.7%

Consumer discretionary +9.0%

Financials +7.7%

Healthcare +4.8%

Energy +2.8%

Materials +1.7%

Real estate +0.5%

Staples -1.1%

The first thing to note, I think, is the strength of gold, which (although I don’t get it at all) is generally thought to be a hedge against inflation and, in the minds of foreign central banks, a substitute for the dollar. The general idea, as I see it, is that the world thinks the Trump administration wants to return to the pre-Volcker days when the Federal Reserve was not an independent monetary authority. The presumed purpose would be to create an increase in inflation that would lower the real value of Treasury bonds–and therefore the burden of redeeming outstanding Treasury bonds. A good trick, in a narrow sense, but one that’s also a significant step on the road to becoming a third-world economy.

A second is that the US has been a laggard stock market since the inauguration. This is arguably due principally to the decline in the world value of the dollar. On closer inspection, though, there’s a second, more indirect but also more important (I think), currency effect: sectors where costs are generally in dollars but revenues at least significantly generated in foreign currency, stock performance has been strong. In contrast, sectors where revenues are predominantly in dollars but costs are in foreign currencies (even the Mexican peso), margins have apparently been squeezed. In any event, performance in this latter area has been especially weak.

In the case of Industrials, the sector name is, I think, somewhat misleading. The companies in this sector generally make things to be sold by firms in the Consumer discretionary sector. Industrials also contains the defense and aerospace sectors, however. That is where the money has been made this year, I think–supplying weapons and outfitting ICE.

Basically, the winning pattern so far this year has been to own IT, Communication services and foreign stocks (I’ve chosen Chinese tech and industrials)–and to stay away from areas like luxury goods, where costs are in foreign currency, with revenues at least partially in dollars.

I’ve just updated my Keeping Score (ii) page for S&P performance in October. The short version is that the month was “all IT, all the time.”

Put a different way, companies whose profits are most closely tied to the performance of the US economy seem to have fared the worst–especially so if they have significant physical assets in the United States–and global companies with chiefly intangible assets like software have done the best. This is a typical pattern for emerging markets, where the current generation sacrifices its well-being and earning power to secure a better future for the next generation. The present Washington twist on this theme is that the ostensible goal is to achieve wealth gains for ultra-rich political donors. Whatever the motivation, the important idea for us as investors is that there’s no hint that anything is going to change in the near future.

It’s also interesting, I think, but I’m not sure how important, that the typical seasonal dip in the stock market that we’ve seen in September-October for decades didn’t occur this year. I’m attributing this to the declining importance of traditional mutual funds and their replacement by ETFs, which don’t have the end-of-fiscal-year tax issues that characterize mutual funds.

Back in the pre-mutual fund days, the income tax-related downward market pressure came in December as banks and insurance companies did their tax planning. Even in my early career, however, that phenomenon was not so important. My guess is that we may notice some downward pressure from this source, but nothing significant.