a PS to today’s post

The Russell 2000, which is composed of medium-sized US-based firms serving mostly US customers is up by 4.5% over the past two years.  This compares with +16.5% for the S&P 500 and +25.5% for the NASDAQ, which are far more globally oriented.  (These are capital changes figures, which I plucked off Yahoo Finance.)

The latter two are 3.7x and 5.7x the return on the Russell 2000.  Attention grabbing, yes, but not the right way to sum up the situation.  More important is that these ratios happen because ex dividends the Russell has returned pretty close to zero.

starting out in 2020

The S&P 500 is trading at about 25x current earnings, with 10% eps growth in prospect, implying the market is trading at around 22.7x forward earnings.  During my working career, which covers 40+ years, high multiple/lower growth has virtually always been an unfavorable combination for market bulls.

Could the growth figure be too low, on the idea that forecasters give themselves some wiggle room at the beginning of the year?

For the 50% or so of earnings that come from the US, probably not.  This is partly due to the sheer length of the expansion since the recession of 2008-09 (pent up demand from the bad years has been satisfied, even in left-behind areas of the country–look at Walmart and dollar store sales).  It’s also a function of shoot-yourself-in-the-foot Washington policies the have ended up retarding growth–tariff wars, suppression of labor force expansion, tax cuts for those least likely to consume, no infrastructure spending, no concern about education…  So I find it hard to imagine positive surprises for most US-focused firms.

Prospects are probably better for the non-US half.  How so?  In the EU early signs are emerging that structural change is occurring, forced by a long period of stagnation.  The region is also several years behind the US in recovering from the recession, so one would expect that the same uptick for ordinary citizens we’ve recently seen in the US.  Firms seeking to relocate from the US and the UK are another possible plus.  In addition, Mr. Trump’s life-long addiction to risky, superficially attractive but ultimately destructive, ventures (think:  Atlantic City casinos) may finally achieve the weaker dollar he desires–implying the domestic currency value of foreign earnings may turn out to be higher than the consensus expects.


The biggest saving grace for stocks may be the relative unattractiveness of fixed income, the main investment alternative.  The 10-year Treasury is yielding 1.81% as I’m writing this  That’s 10 basis points below the dividend yield on the S&P 500, which sports an earnings yield (1/PE) of 4.  I say “may” because, other than Japan, the world has little practical experience with the behavior of stocks while interest rates are ultra-low.  In Japan, where rates have flirted with zero for several decades, PE ratios have declined from an initial 50 or so into the low 20s. Yes, Japan is also the prime example of the economic destructiveness of anti-immigration, anti-trade, defend-the-status-quo policies Washington is now espousing. On the other hand, it’s still a samurai-mentality (yearning for the pre-Black Ship past) culture, the population is much older than in the US and the national government is a voracious buyer of equities.   So there are big differences.  Still, ithe analogy with Japan holds–that is, if the differences don’t matter so much in the short term–then PEs here would be bouncing along the bottom and should be stable unless the Fed Funds rate begins to rise.

That’s my best guess.


The consensus was of viewing last year for the S&P is that all the running was in American tech industries.   Another way of looking at the results is that the big winners were multinational firms traded in the US but with worldwide markets and very small domestic manufacturing and distribution footprints.   They are secular change beneficiaries located in a country whose national government is now adamantly opposing that change.  In other words, the winners were bets on the company but against the country.  Look at, for example,  AMZN (+15%) vs. MSFT (+60%) over the past year.

The biggest issue I see with the 2019 winners is that on a PE to growth basis they seem expensive to me.  Some, especially newer, smaller firms seem wildly so.  But I don’t see the situation changing until rates begin to rise.


Having said that, low rates are an antidote to government dysfunction, so I don’t see them going up any time soon.  So my practical bottom line ends up being one of the gallows humor conclusions that Wall Streeters seem to love:  the more unhinged Mr. Trump talks and acts–the threat of bombing Iranian cultural sites, which other governments have politely pointed out would be a war crime, is a good example–the better the tech sector will do.  As a citizen, I hope for a (new testament) road-to-Damascus event for him; as an investor, I know that would be a sell signal.









Keeping Score, September 2019

I’ve just updated my Keeping Score page for September 2019.  No sign so far of the traditional actively-managed mutual fund selloff in advance of the Halloween yearend.  I wonder why.  Is this a function of the AI era?   …the fact that passive money under management exceeds actively managed?   …is selling just late?

Will no selloff now mean no 4Q rally?    …that would be my guess.

$30 billion in new tariffs–implications

Yesterday Mr. Trump announced by tweet that he intends to impose a 10% duty, effective next month, on all US imports from China that are not yet under tariff.  That’s about $300 billion worth, which would produce an extra $30 billion in tax revenue for the government, were imports to continue at the pre-tariff rates.

What’s different about the current move is that tariffs will be predominantly on final goods, that is, stuff that’s completely made and ready for sale, things like like toys and everyday clothing.  For the first time, tariffs won’t be disguised.  Up until now, they’ve been mostly on raw materials or parts, where the connection between the tax and price increases of the final product is obscured–the political fallout therefore milder.   The new round will be more visible.


Standard microeconomics will apply:

–the cost of the new tax will be borne in part by US companies and in part by consumers, depending on how much market power each has

–over some period of time, companies and consumers will both look for lower-price substitutes for items being taxed.  Firms will, say, offer lower quality merchandise at the current price point; consumers will either buy fewer items or shift to cheaper merchandise


The new tariff amounts to a subtraction of about $250 from family discretionary income, meaning income after taxes and all necessities are taken care of.  That’s not a big number.  As with the other Trump tariffs, however, average Americans will be disproportionately hurt.  The bottom 20% by income have less than nothing after necessities now, so they will be the worst off.  Residents of the poorest states–eight of the bottom ten voted for Trump–as well.  So too anyone on a fixed income.


Netting out the positive effect of the 2017 income tax cut, the only winners are the top 1%, traditional Republican voters.  Other Trump supporters appear to be the biggest losers, although far they don’t appear to have connected the dots.  Nor does anyone in Congress seem to be questioning the administration rationale that national security does not require better infrastructure and education but does demand more expensive t-shirts and toys.


The stock market selloff underway today doesn’t seem to me to be warranted by the new tariff.  And it’s not exactly news that Washington is dysfunctional:  we’re led by a man who thinks our independence was won by controlling the airports; the leading opposition candidate somehow mistakenly thought his businessman/repairman/car salesman father was a laborer in the Pennsylvania coal mines.  So the most likely explanation is that in August human traders/portfolio managers head for the beaches, leaving newspaper-reading robots in control of Wall Street.

If that’s correct, the thing to do is to look for stocks to buy where the selloff appears crazy, getting the money from clunkers, which typically hold up in times like this or from winners whose size has gotten too big.











navigating through confusion

a (very) simple sketch

I can’t recall a more complex, hard to read, time in the stock market than the present.  There have certainly been more panicky times–like October 1987 or early 2000 or late 2008.  But all of these, however frightening, were about financial markets building a speculative house of cards which ultimately collapsed of its own weight.  The basic framework in which the game was played remained more or less the same:  continuously declining interest rates, the growth of multinational companies, revolutionary developments in computer technology, the shift in developed economies from laborers to knowledge workers, continuing dominance of the US economy.

what has changed?

–the Internet is here, with its attendant powerful hardware (servers, smartphones) and software (the cloud, Amazon, Facebook…  e-commerce, information, entertainment) devices

–the aging–and, ex the US, increasing lifespans–of the populations of developed economies

–ultra-low interest rates, negative in parts of Europe

–the rise of China, and to a much lesser extent, India as global economic powers

–most recently, the Huawei moment, sort of like Sputnik, when the US realizes that a Chinese company is producing more advanced/ less expensive cutting-edge telecom equipment than it can

–fracturing of belief in the invisible hand aka trickle-down economics, the (ultimately religious/Enlightenment philosophical) belief that individuals acting in their own self-interest somehow create the best possible outcome, both for the world as a whole and for each individual.  This fracturing fuels the rise of the radical right in the US and Europe, I think.


more tomorrow




stock market issues for 2019

I see four main issues, which–now that I’m on semester break–I’m planning to write about over the next few days.  They are:

machines vs. humans.  This is the question of increased short-term volatility.  How do we cope with the apparently mad dashes in and out of the market by trading robots using, by historical standards, half-baked trading algorithms?


decelerating earnings growth.  EPS growth in 2018 for publicly traded companies was around +20%.  Increases for 2019 will likely come in at +8% – +10%.  This kind of sharp falloff is normally a bad sign for stock prices.  In the current case, however, the 2018 EPS surge is only in after-tax earnings and is due mostly to the one-time decrease in the Federal corporate tax rate from 35% to 21% that went into effect last year.   Pre-tax earnings grew at a much more sedate rate of around 10%, I think.  While the 2019 situation isn’t wildly positive, it would seem to me to imply a flattish market where the investor’s job is to identify areas of potential strength to buy and areas of potential weakness to avoid.

But is this the way algorithms will operate?


the business cycle and interest rates.  Typically, the Fed raises short-term rates when it perceives the economy is overheating.  Higher rates make bonds less attractive.  They make other financial instruments, like stocks, less attractive, too.  But the negative effect of higher rates is offset by surging earnings growth.  Is +10% enough to do the job in 2019?


–tariffs.  (A side note first:  it seems to me the Trump administration argument that it can usurp Congress’s power to set trade policy because everything economic is a matter of national security is ludicrous.  Not a peep from Congress, though.  To me, this implies that Mr. Trump is simply the spokesmodel for policies the forces in Congress want enacted but don’t want to be held responsible for.)

Tariffs have, at best, a checkered history.  They invite retaliation.  They have unforeseen/ unintended negative effects: Apple’s preannouncement of weaker than expected results in its current quarter may only be the first.   In addition, the rapid and seemingly arbitrary way tariffs have been enacted in the US has already given both domestic and foreign corporates pause about expanding operations here.  One thing is certain, though –tariffs slow economic growth.  The question is by how much and for how long.


the independence of the Federal Reserve.  By conventional measures, there’s still too much money sloshing around in the US.  So there’s every reason for the Fed to continue to shrink its bloated balance sheet and to slowly raise short-term interest rates (the specter of Japan’s three decades of stagnation–resulting in large measure from saveral bouts of premature policy tightening–continues to be a cautionary tale against moving too quickly).  Because of this, Mr. Trump’s musing about firing Jerome Powell has a distinctly Nixonian ring to it, conjuring up echoes of the runaway inflation and currency collapse in the US of the 1970s.  From a stock market point of view, threatening the Fed may be the single most damaging thing Mr. Trump has done so far.


More details over the next few days.