I think yesterday could turn out to mark an important shift for US stock trading.

First, some performance figures:

year-to date       from the March low       yesterday          2 years     3 years

NASDAQ                   +2%                    +34%                           +2.4%           +22.6%       +48.2%

Russell 2000           –20%                    +33%                           +6.1%            -18.0%          -2.5%

S&P 500                    -9%                     +20%                           +3.2%             +8.9%        +20.2%

The S&P is just there for reference–and because it’s the key US equity benchmark.  The comparison I want to draw is between tech-heavy global-reach NASDAQ and the made-and-sold-in-the-USA Russell 2000 mid-cap index.

The difference year to date, 22%, in favor of NASDAQ, is huge.  Even more dramatic, the spread over the past two years, again for NASDAQ, is a whisker over 40%.  Over three years, it’s +50%+.  For the R2000, it’s like DJT (Trump Hotels and Casino Resorts) all over again.

Unfortunately for all of us Americans I think this will remain the primary trend for at least as long as the current administration is in office.

However, fear of the economic damage created by Trump’s pandemic denial has caused investors to stretch NASDAQ/R2000 valuation differences to the breaking point.  Yes, we’re considerably off the lows.  But economically sensitive stocks (R 2000) are still being priced, relative to NASDAQ, as if we were still at the worst level of panic.

But the market seems to be coming to believe that the relative rubber band has been stretched too far.

Evidence?

–during the rebound from the late March lows, the Russell 2000 has kept pace with the NASDAQ for the first time in a long while–despite the much greater damage from the pandemic domestically than abroad

–post their initial large upward leap, there has been a duel for maybe a month within NASDAQ between tech like Shopify, Zoom and Beyond Meat that’s perceived to benefit from the pandemic, and more traditional tech firms.  On fear days, the former go up, both in absolute terms and relative to the market; on more optimistic days, they go down.

–the epic underperformance of the Russell 2000.

In other words, the market is back to analyzing and pricing risk again, instead of just panicking.

To my mind, yesterday suggests the market is starting to expand its horizons and sort through the rubble of economy-sensitive stocks in a more serious way.  I think this will continue.  For how long?   I don’t know.  My guess is at least a month.  But maybe much longer.

same conclusion, different thought process

Coming at this from a different direction (the one that actually started me down this track):

A competent growth stock manager should easily be 500 basis points ahead of his/her benchmark, year-to-date.  Could be a lot more.

This is gigantic.  It’s like being up 15 – 0 in the fourth inning of a baseball game.

Strategy has got to shift from trying to score more runs to protecting the lead.  Unlike baseball, this is straightforward for a portfolio manager to do.  Become more like the index.  You won’t gain more outperformance ( which you don’t need) but you won’t lose any either.  You do this by buying the domestic cyclicals that have been market laggards for so long.  An added plus, they’re still in the bargain basement.