…away from secular growth and toward business-cycle sensitives.

Over the past five trading days, including today (I’m writing just after noon), the Russell 2000 is +6.8% and the NASDAQ is up +2.4%.  Half of the relative gain has come so far today.

Unless/until we get bad coronavirus news, I think this movement will continue.

What to do?

The safest thing to do is to stick to your long-term strategy.  Use this as an occasion to adjust holdings, not a cause.  I think the primary reason for the current move from secular growth to cyclical is the huge performance differential that has built up between the two indices, not a fundamental change in trend.  Sort of like the losing team getting a turn at bat.

On the other hand, for someone willing to put in the time and effort, I think this could be a counter-trend rally that goes on for a couple of months before reversing itself.  To pluck a number out of the air, it could mean a 10% relative gain from here for the Russell over NASDAQ.

As for me, about a month ago I bought a small amount of an R2000 ETF and a smaller amount of MAR.  That lost me a tiny amount of performance.  I added to both two weeks ago.  That has worked out better so far. I added more R2000 today, bringing my total shift to just under 10% of my portfolio.

If what I said two paragraphs up turns out to be correct–and if I reverse what I’m doing at the right time–I’ll have gained around 100 basis points in performance.  The figure would be much higher if we could see an end to Trump’s highly damaging economic policies, or if his election opponent weren’t a septuagenarian whose fastball appears to have lost a lot of zip.

is this enough reward to justify taking the risk of being wrong?   Unless you’re involved with your portfolio every day–and I am now that art school is  over (graduation tomorrow)–probably not.  But it keeps my hand in.

market rotation

We all understand what the winning formula for the pandemic stock market looks like:  overweight NASDAQ, underweight the Russell 2000;  overweight secular growth stocks with worldwide sales, underweight US-centric business cycle sensitives.

At some point, however, at least one of two things happens:

–evidence starts to build that the worst of the pandemic-induced slump in economic activity is past us.  Companies start hiring again; credit card sales start to pick up; houses begin to be sold…   or,

–the valuation difference between safe havens and pandemic losers becomes so great that contrarians begin to sell the former to buy the latter.

In either case, the market rotates away from what has been successful so far into something else.

Two questions:  when and toward what.

On the valuation front, year to date NASDAQ is down by 3% (among heavyweights, MSFT is +12%), the Russell 2000 is -27%.  Yes, this is the trend we’ve seen through most of the economically toxic Trump administration.  But the magnitude is different.  This is a huge gap in a short amount of time.

Nevertheless, despite the fact I would really like to shift my holdings away from recent winners, price action isn’t giving me the slightest encouragement to do so.

For me, the “toward what” isn’t really clear either.  So it may be that professional investors will take the very unusual step of simply raising cash and waiting.

As for me, I’m staying on the sidelines with the same tech/cloud-heavy portfolio.

a third factor 

A cardinal rule for investment success during my 40+ year involvement with stocks has been to avoid worrying too much about politics.  Think calmly and objectively instead.  It’s becoming difficult to ignore the increasingly bizarre and worrisome actions of the Trump administration, though, which are also taking on more and more of a 1984 tone.

Lack of attention to education, retraining workers and aging infrastructure–failings of both major political parties–are bad enough.

But now there’s Trump’s doubling down on his worst-in-the-world response to COVID-19, which has so far cost the US more deaths than all our armed conflicts since WWII.  (According to the Financial Times, 90% of these deaths were preventable had Trump not continually asserted the pandemic was not real.)

Then there are his recent threats to bar Chinese students from US universities and to deny Chinese-made goods entry to the US–more signature shoot-yourself-in-the-foot moves.  Perhaps more important in a pragmatic sense, Trump threatens a lot but does nothing.  To me, this is the worst of all possible worlds because it exposes his underlying weakness.

Finally, as an Army veteran I’m particularly disturbed that Trump is destroying the career of the Navy captain who rescued his crew when he found his aircraft carrier a coronavirus hotspot.  At the same time he’s pardoned a convicted war criminal and is now trying to have charges dropped against former General Flynn, who confessed to lying to the FBI to conceal his work as an agent of the Russian government.  In other words, Duty, Honor, Country and the content of one’s character mean nothing.

A rant, yes.  But there is a point.  The Hitler vibe is certainly not a positive for potential buyers of US goods and services in foreign markets.  Nor are indifference to human life and race hatred a big draw for foreign investment or tourism here.