Mike Lipper’s Monday Morning Musings
This Week’s Implications for Our Investment Future
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Late-Stage Markey Surges
Through Thursday, the average US Diversified Equity Fund rose +2.49%. While not followed closely beyond the mutual fund business, it should be. The total assets of these diversified funds at the end of January were $ 10.7 trillion, compared to $16.2 trillion in all equity funds. These are the aggregate investment decisions of the largest group of individuals and institutions, distinct from measures developed by publishers.
Each week I look at the performance of 18 different types of diversified equity funds, which excludes more narrowly based specialty funds. Two observations of this week’s performance are:
- This week’s performance is unsustainable. If annualized, the performance would be almost 260% for the year.
- Within the largest macro fund category, S&P 500 Index Funds gained +1.20% and ranked 17th out of 18.
These observations are like what I have seen or read about in the late stages of a “bull” market. In most markets, the performance for S&P 500 Index funds rank in the middle to top of their macro group. The reason for this is that they are low turnover portfolios, with no cash holding them back in rising markets.
Late-Stage Leaders
If the +2.49% gains for US Diversified Equity Funds is unsustainable, then look at the other four leading investment averages:
China Region +5.29%
Equity Leverage +5.10%
Global Science & Tech +4.22%
Small Cap Growth +4.04%
(Remember, these numbers are averages, several funds had substantially greater than average gains.)
Other Late-Stage Observations
- Contrarian indicators include an 8% increase in bullish sentiment for the American Association of Individual Investors (AAII) weekly survey, which now stands at 45.5%.
- 81% of Wall Street Journal prices rose this week.
- Both the New York Stock Exchange (NYSE) and NASDAQ reported a 6% drop in short sales. (The reason a drop in short sales is viewed as a negative is that short sales need to be closed by a purchase, which adds to volume.)
- Market analysts become nervous or at least suspicious when formerly visible trades are hidden. 47.2% of equity trading-volume was not on the publicly traded stock exchanges. While this may lead to some investors getting better prices, it raises questions as to the validity of reported prices. This is not reassuring in highly speculative, volatile markets.
Possible Investment Implications Learned from the Impeachment Hearings with a look at History.
As much as possible, the following observations are intended to help make the investment decisions that will impact future investment performance. Words spoken by elected and unelected politicians are like hourly or daily temperature readings, good for conversations but not to be taken seriously when setting and executing long term investment policies. Actions have longer-term implications for historical purposes and provide some factual inputs in understanding what happened. Far more important are the reactions to actions, usually not by the original actor.
The following is a historical example of this principle. The Imperial Government of Japan attacked the US naval and airfield installations in Pearl Harbor on December 7th, 1941. The attack was timed with similar attacks in Asia to establish a “Co-Prosperity” Asian region, with Japan as its supreme leader. The attack on the US was designed to prevent a well-armed US from coming to the aid of the Asian countries being invaded. They were successful in destroying our aging battleships. (For the only time in recorded history, the US aircraft carriers were out at sea alone.) This was the deed, but the key to the future was the reaction.
FDR used the attack to declare war on Japan, as was expected. But in addition, he declared war on Germany and the axis allies, which was not expected. (FDR did not want to be considered a President Wilson, who entered WWI two years late and changed the history of Europe, Russia, and WWII. He was conscious that his cousin, Theodore Roosevelt, had won a Nobel Peace Prize for settling the war between Imperial Russia and Japan. Later, he split the presidential vote in the US, which elected Woodrow Wilson as a minority President.) FDR resisted entering the War with Germany for two years, as it would have been unpopular in the US and would have added to the problems of his mismanagement of the economy, which resulted in the longest and deepest depression in US history.
What the Japanese did not count on, was the attack on Pearl Harbor and the saving of our aircraft carriers giving FDR’s the political power to galvanize the US. It enabled him to fight both a World War and push through various social moves which had not been possible beforehand. Regardless of how one feels abut my narrative, there is no question that the reaction to the attack on Pearl Harbor was much different than the Japanese had intended.
Could We Be in a Similar Position Now?
Some have suggested that the new administration is the most politically left leaning group since FDR. The staffing of the Cabinet and administrative functions with former Obama people is like FDR’s brain trust. To see the ambition of the current leadership, read the proposed Antitrust Merger Standards, which would allow the government to decide on all future mergers. (This is a backdoor way to establish an “industrial policy”, which numerous countries have thankfully tried, removing a lot of vital competition in the global market. Another example of the ambition of some in Washington can be seen in the “reconciliation budget” proposal from the Financial Services Committee in The House. It has a current spending plan of $38 Billion and would reach $72.9 Billion by 2031. (I would like to learn how much our taxes will have to rise for this relatively small desire of the party.)
The President Could Be Saved from Himself
Just as reactions to an action can be contrary to the expressed wishes of the actor, so too can the current actions of the President and The Speaker of the House. We are seeing them both play to their own majorities, but they are driving away more of the middle in the process. Considering both of their elections had smaller pluralities than expected, the House Leader is now the only person in her role to lose two impeachments, which could have been won if better managed. The President appears to be creating more unemployment, more businesses closings, and a reduction in the level of education at all levels. We will have to see if any foreign government does anything meaningful we want.
If Not, is a Long Recovery a Prospect?
Without meaningful political changes, an FDR length depression could occur. Right now, I believe most worried investors are still treating the current phase as a cyclical depression that should be complete within four years. That is what I am doing, but it could be a lot longer and I am not prepared for that.
Question of the Week: What is the worst for which you are prepared?
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2021/02/adjust-investment-tools-for-next-phase.html
https://mikelipper.blogspot.com/2021/01/is-gamestop-missing-event-weekly-blog.html
https://mikelipper.blogspot.com/2021/01/are-we-strolling-promenade-deck-of.html
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A. Michael Lipper, CFA
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