Navigating a New Investment Landscape Amid Political and Structural Challenges - Weekly Blog # 871

 

Mike Lipper’s Monday Morning Musings

 

Navigating a New Investment Landscape

Amid Political and Structural Challenges

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

It seems we’ve entered a new phase in the investment and political landscape, marked by a shift in leadership rhetoric and strategy. Two prominent U.S. political figures have emerged with ambitious proposals aimed at addressing global challenges. Their approaches are novel but lack grounding in the current political and economic structures and are deficient the experienced teams needed to implement such revolutionary ideas effectively.

 

This lack of preparation extends to their inability to articulate clear plans for reshaping the tax and legal frameworks that underpin these initiatives. As history has shown, it’s one thing to suggest sweeping changes and quite another to navigate the intricate process of execution. The political structure, with its numerous committees and competing interests, will likely make swift action both costly and slow.

Further complicating the outlook are legal hurdles. Many of the proposed changes are bound to face challenges in the courts, and state-level resistance will add another layer of complexity—particularly as we approach the midterm elections in 2026. Even the 2028 presidential election may not yield a resolution to many of these contentious issues, as a single-term president rarely has the time or political capital to enact and sustain transformative change.

 

Internationally, the situation is equally fraught. Most foreign governments remain unpopular with their own citizens and their policy maneuvers could further complicate U.S. domestic politics. This interplay between global and domestic pressures creates an unpredictable environment for investors and policymakers alike.

 

Education: A Critical Bottleneck in U.S. Productivity

One structural issue underpinning these challenges is the state of education in the United States. From pre-K to PhD programs, our education system struggles to produce workers equipped with the skills necessary for a competitive and productive economy. This shortfall is one of the reasons U.S. productivity lags behind its potential, especially when compared to other advanced economies.

 

Leadership Development: A Missed Opportunity

Another critical issue lies in how we cultivate leaders, particularly in business. Too often senior managers are not given the opportunities they need to learn, adapt, and ultimately succeed. This is a lesson I’ve come to recognize in my own small business. In hindsight, I’ve been guilty of not providing my junior team members with enough hands-on experience to develop their skills fully. This shortfall isn’t unique to my situation, it’s a systemic issue across industries and is one that hinders the ability of future leaders to thrive.

 

Final Thoughts on Political and Economic Uncertainty

Navigating this era of political and economic uncertainty will require a combination of patience, adaptability, and strategic foresight. While the challenges are significant, they also present opportunities for investors and leaders who can anticipate changes and position themselves accordingly. As we move forward, it’s crucial we address foundational issues like education and leadership development — both of which are essential to building a more resilient and productive society.

 

Multiple Changes on the Horizon

A new administration will usher in a number of changes, adding to those already in place but still in their infancy. These changes are significant and will likely have an impact on us all in some way or another. They present investment opportunities and some risk, so it behooves us all to be aware of them.

 

Interest Rates

The market sold off on Friday, largely as a result of good employment news signaling a decent economy, causing investors to fear a good economy getting in the way of future Fed rate cuts. However, there is debate among others concerning the necessity of further interest rate cuts, as the economy is reasonably strong, and interest rates are already below historic norms.

 

Longer-term Treasury rates have continued to rise alongside Fed rate cuts, as future government debt refinancing needs put upward pressure on rates. While higher interest rates will be an obstacle for businesses to overcome, a good economy should provide opportunities for businesses to excel.

 

There is a misunderstanding that interest rates are an initiator of change. This is a problem brought on by the failure of the educational system.  From pre-nursery schools continuing on through to PhDs. Important changes in the global direction of the economy are caused not by top-down thinking of governments, but by the success and failures of commercial ventures, starting with small businesses.  

 

Long-term investors need to pay attention to the edges of progress and the failures of business.  For investors the focus should be on the development of people working at the edge of progress.  This is not to say that small businesses are good investments, but they are change agents in terms of progress and that is where intelligent focus should be placed. We welcome subscribers’ views in contradiction and occasional support of these ideas.

 

Technology

We are in the early stages of a significant technological revolution, with AI, robotics, and quantum computing likely to change the world in ways we can barely conceive. The investment implications will likely be significant. However, what it does to employment around the world is an open question.

 

Energy

An energy renaissance is on the horizon, not only for fossil fuels, but for nuclear energy too. Small-scale nuclear power plants are increasingly being considered by global businesses in anticipation of the increased energy needs required by our new technological future. Small scale nuclear is now being embraced by the left and the right, so it is very likely we will see some of this trend materialize. Increased energy production and lower energy costs should be a boon to business.

 

The Middle East and Ukraine

We could see peace restored in the Middle East and Ukraine as a new administration with different ideas enters office. Peace in these regions will lead to the necessary rebuilding of homes and infrastructure. It remains to be seen where the funds for rebuilding will come from and what global political deals will be struck to make that happen. While this will be a burden on governments and taxpayers, businesses will likely find new opportunities.

 

The Panama Canal and Greenland

The potential threat posed by China’s control of global choke points has raised the issue of control of the Panama Canal and Greenland. The Panama Canal is an important trade route for the US and its control cannot be allowed to fall into the hands of an increasingly aggressive China.

 

Greenland is expected to be an increasingly important trade route, especially as global warming continues to heat up the planet. Additionally, Greenland has a number of minerals and metals needed for a technology driven future. The control of both the Panama Canal and Greenland will likely be significant global topics of discussion in 2025, with investment implications further in the future.

 

California Fires

The California fires have been devastating in their scale and impact on people’s lives. Over 200,000 people have been displaced and over 12,000 homes and buildings have been destroyed. The emotional and financial cost will be significant. Rebuilding will not come soon enough for some people, and they may just find it easier to restart their lives elsewhere.

 

The cost of rebuilding will place a financial strain on all participants: insurance companies, Los Angeles area cities, the state of California, the Federal government, and people with inadequate insurance. The fires may even change the political landscape, refocusing California voters on bread-and-butter issues rather than social issues. Much like the rebuilding in Ukraine and the Middle East, the rebuilding in California will result in costs to government and taxpayers but will also present business opportunities.

 

Final Thoughts on Changes

Change is often uncomfortable and most of these changes will not be implemented without some problems along the way. However, change also comes with opportunity and those who embrace it will be the beneficiaries. Uncertainty often makes the market nervous, so buckle up, it will likely be a wild ride.

 

 

 

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Mike Lipper's Blog: Unclear Data Mostly Bearish, but Bullish Later - Weekly Blog # 870

Mike Lipper's Blog: A Different Year End Blog: Looking Forward - Weekly Blog # 869

Mike Lipper's Blog: Three Rs + Beginnings of a New Cycle - Weekly Blog # 868

 

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Unclear Data Mostly Bearish, but Bullish Later - Weekly Blog # 870

 

Mike Lipper’s Monday Morning Musings

 

Unclear Data Mostly Bearish, but Bullish Later

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

First Half

Marcus Ashworth is one of the best market analysts who writes daily for Bloomberg.  In a recent piece he focused on volatility, with the following introduction:

The election of Donald Trump introduces an 

unwelcome capriciousness to US policy making,

with everything from trade to regulation to crypto-

currencies looking decidedly less predictable. And 

while the US consumer continues to defy expectation

by keeping the world’s largest economy rolling

along just fine, the rest of the world is a lot less

robust. Our key message for 2025: Buckle up, it’s

“gonna” be a roller coaster.

 

It is my own view that even Mr. Trump does not have a complete view of what is going to happen. As shown in the recent election of the House Speaker, members of both the Senate and House act differently than the majority of their party and will be paid off in some known or unknown way. Furthermore, going back to early American history, foreign powers will express their will and influence on our results and actions.

 

Chartists’ Views

We have heard many times that history does not repeat itself but often rhymes. One of the easiest ways to record the rhymes is through charts, which are often right as to future price moves. They have learned that future reversals can frequently be successfully predicted. The standard pattern for trend reversals is a “head and shoulders silhouette”. The three or more peaks with the center one being the highest shows each of the peaks declining to a common neckline. Currently, the two shoulders have hit their necklines and bounced up a bit. Most important to me, this describes the S&P 500 price action. If it breaks the neckline that indicates the likely chance of a significant decline.

 

Historically, significant declines often follow substantial increases, like those we have experienced. Declines often occur after valuations have been stretched like a rubber band. The measure I find helpful is the ratio of market value to book value. Currently, the S&P 500 ratio is 5.37x vs 4.58x a year ago. This seems like quite a stretch.

 

AAII

Many professional analysts look down on the retail market despite a reasonably good long-term track record. Like many others, it tends to be wrong at turning points. The AAII sample survey asks their participants if they are bullish or bearish for the next 6 months. I find the percentage difference between the bulls and bears of interest. The spread for last week was only 1.9% vs. 3.7% the week before. In each case the bulls were on top. My reading is that these investors are usually very intense in their views. The view they share with many professionals is that they are waiting, but don’t know what they are waiting for!

 

Other Straws in the Wind

Many of these relationships could change significantly:

• The bottom third of credit card holders are tapped out.
• The five best-selling car brands in the US are foreign.
• Only 44% of weekly prices tracked by the WSJ were up in the latest week.        

 

Most Funds Don’t Perform

There are 103 peer groups that I look at to see if they on average beat the S&P 500 Index fund. Below are the results showing the number of Equity and Equity Related Fund Groups that beat the average S&P 500 Index Fund for 1, 5, and 10 years.

 1-Year     5-Years      10-Years

   8            4               3

   

Just like following Professional Golfers, the ordinary weekend player can learn useful techniques, avoid many injuries, and enjoy investing.

 

Beware of Simplistic Data

It is popular to compare mutual fund gross sales to ETF sales, taking the difference as an indication of popularity. The problem is fund redemptions are built-in the day a fund is purchased. Redemptions for many holders is the completion of a planned period or condition, regardless of performance. The average age of a mutual fund owner is senior to when they initially purchased the fund. Many redemptions are also mandated by retirement vehicles, such as required mandated distributions.

 

ETFs are like buying individual securities. The buyer is often considerably younger and considers it a form of trading. To net these actions is like purchasing a car for dating when you need a car to get to work or to transport your family.

 

Question: Are there any topics you would like me to explore, or correct?    

 

 

 

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Mike Lipper's Blog: A Different Year End Blog: Looking Forward - Weekly Blog # 869

Mike Lipper's Blog: Three Rs + Beginnings of a New Cycle - Weekly Blog # 868

Mike Lipper's Blog: Confessions & Confusion of a “Numbers Nerd” - Weekly Blog # 867

 

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Correction to Weekly Blog # 869

Correction to Blog 869

Please be advised of the following two corrections to Blog 869:

1. There were only 17 peer groups that achieved a 10% compounded return for the last 5 years and just 3 that beat the S&P 500 Index funds average. I am suggesting for the next 5 years it may be quite difficult to produce a 10% compound return.
2. The latest example of this is the FDIC, which has wrung an agreement from Vanguard (not NASDAQ as originally stated) to limit the amount of ownership in small and regional banks.

I hope this clears up any confusion I may have created with the original text and hope our subscribers and their friends/families will have a healthy, happy, and profitable 2025 and beyond.

                                                                                                          Mike

A Different Year End Blog: Looking Forward - Weekly Blog # 869

 

 

 

Mike Lipper’s Monday Morning Musings

 

A Different Year End Blog: Looking Forward

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

Using Mutual Fund Data for Other Investors

Mutual Funds reveal their investment performance to the public every trading day and reveal their portfolios quarterly. In many cases the funds are managed by large investment managers responsible for other accounts. Their portfolios by implication reveal some of their philosophy of investing for other accounts.

 

Each week the London Stock Exchange Group publishes fund data that I used to produce. The report tracks 103 equity fund or equity related fund peer groups. Using the last five years of data, the shortest time period one should use in assessing investment performance, only 17 peer groups beat the +14.58% five-year return of the average S&P 500 index. (In selecting funds, I prefer to use 10 years.) There were three peer groups that did better than the S&P 500 Funds Index:

• Science & Technology +17.72 %
• Large-Cap Growth +16.62%
• Energy MLP +14.64%

Remember these are averages, so within the peer group some funds did better or worse than their group average. With only 16.5% of the groups beating the index, I question whether we are preparing a base for a meaningful general stock market advance.

 

Current Structure of the Market

The last four trading days of last week may not be significant but could be. The next two trading days will probably be dominated by last-minute tax-oriented transactions initiated by market makers or late players.

 

In the last four days 49.4% of the shares on the NYSE rose, while 55.8% rose on the NASDAQ. The more bullish NASDAQ players generated 205 new highs, compared to only 73 on the NYSE. Investors participating in the weekly AAII sample survey have been moving toward neutral in the last three weeks. Three weeks ago, the Bulls represented 43.9%, but they only represent 37.5% in the current week. The Bears only increased by 2.4% to 34.1%.

 

Possible Longer-Term Signals

Both political parties feel they should direct the private sector to a much greater degree than in the past. The latest example of this is the FDIC, which has wrung an agreement from the NASDAQ to limit the amount of ownership in small and regional banks. This a long echo of the “Money Panic of 1907” that Mr. Morgan solved in his locked library, which led to the creation of the Federal Reserve. A generation later the US government realized the Fed couldn’t help local farmers, their banks, and suppliers, so they passed the Smoot Hawley tariff bill, which was reluctantly signed by President Hoover.

 

Both the good and bad leaders of many countries recognize that the US has not won a war since WWII. Consequently, the growth of China in many fields is disturbing. Tariffs may protect some US businesses at a huge cost to lower income consumers and eventually isolate the US from growing markets, diminishing our military strength.

 

These issues and others are what we will be dealing with in the new cycle we have entered.

 

We wish you, your family, and friends a healthy, happy, and prosperous New Year.

 

 

 

 

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Mike Lipper's Blog: Three Rs + Beginnings of a New Cycle - Weekly Blog # 868

Mike Lipper's Blog: Confessions & Confusion of a “Numbers Nerd” - Weekly Blog # 867

Mike Lipper's Blog: It Doesn’t Feel Like a Bull Market - Weekly Blog # 866

 

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Three Rs + Beginnings of a New Cycle - Weekly Blog # 868

 

 

 

Mike Lipper’s Monday Morning Musings

 

Three Rs + Beginnings of a New Cycle

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

Three Rs Describe the Week

The first part of the week in terms of transaction volume on the NYSE + NASDAQ looked somewhat normal, but by midafternoon the world changed. We got the expected ¼ percent cut in Fed interest rates. However, during the press conference Jerome Powell stipulated his lack of confidence in the intermediate future outlook for Fed actions. As the conference went on, selling accelerated. By the closing bell many stocks had fallen, then some fell between 3-5% or more in the after-market. Interestingly, Thursday saw little movement. Trading volume for the first four days of the week was 4.72 million shares. On Friday there was news of one indicator showing inflation likely to decline, which was greeted with 8.13 million shares traded mostly on rising prices.

 

This was the first R, demonstrating the trader’s recalibration of inflation estimates, showing particular strength in techs and high-quality bond prices crunching.

 

The second R saw a further breakdown in the reversal chart pattern of the DJIA and DJTA. (Chart reading is an artform and is not accurate all the time.)

 

The third R, the need to deal with reconciliation of the budget, was perhaps the most significant and became known on Saturday. The final votes in favor were impressive. The House voted 366 to 34 in favor and the Senate 85 to 11. This proved my earlier view that there was no real landslide for President Trump. The American people don’t want much legislation or many executive orders.

 

What Does This Mean?

We live in a world where:

• Most governments are tolerated or downright unpopular.
• Technology appears to create more problems.
• People are afraid of both political and corporate leadership.
• The education sector can’t even run its own campuses safely. They are producing unemployable and over-privileged people only ready for “C-suites”.
• Hard science is not providing much help for the soft science needs of the population.

 

Several examples of not understanding labels hit me this week, emerging markets and large global companies dominated by the five largest firms. The largest firms are attractive because they are exporters to large markets. Thus, to be successful one must be global.

 

Another example is the published list of the 15 best and worst mutual funds. If you are a large investor, the list is misleading. Of the best performing funds, 13 funds were from large fund families, whereas only 6 funds were from large fund families on the worst funds list.

 

Even with AI people need to think more thoroughly.

 

Please suggest what you think the next cycle will look like. 

 

 

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Mike Lipper's Blog: Confessions & Confusion of a “Numbers Nerd” - Weekly Blog # 867

Mike Lipper's Blog: It Doesn’t Feel Like a Bull Market - Weekly Blog # 866

Mike Lipper's Blog: Professional Worry Time vs Amateurs’ - Weekly Blog # 865

 

Did someone forward you this blog?

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Confessions & Confusion of a “Numbers Nerd” - Weekly Blog # 867

 

 

 

Mike Lipper’s Monday Morning Musings

 

Confessions & Confusion of a “Numbers Nerd”

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

Numbers Tell The Story

 My education at Columbia University, the USMC, and taking the CFA taught me that numbers tell the story. My brother and I created a company that sold mutual fund data for some of the largest fund organizations in the world. The problem is it was the wrong story. I fell into a trap common on the numbers loving Wall Street.  The trap is using numbers as a tool for many applications for which they were not intended.

 

The original sin was using the changing price level to make investment decisions, +10% or -8%. This leads to being happy with +10% and unhappy with -8%. Raw numbers can be misleading, until you understand the usage of numbers and their appropriate comparison.

 

Early in my career I called on the partner and treasurer of a management company who informed me he didn’t need our service because he had found something better. I asked to see this remarkable comparison. He showed the performance of all funds, regardless of mission, in his city! He was using the hometown comparison to set the wages of his workers. (Luckily, an outside lawyer working with the independent fund directors immediately recognized that what I was peddling would be essential for the directors.)

 

This experience brought home that there were at least two different needs in the same shop. The treasurer had an operational need to gage the competitive availability of labor needed for the fund’s work, while the lawyer wanted the directors to know how each of their funds were doing competitively.

 

Numbers in the right context are critical. An example of this is the +10% -8% example. The +10% is quite poor in a league averaging +20%, with the best at +30%. The -8% could be superior when the competitive average is -20% and the worst fund is down -30%.

 

Some psychologists believe losses are twice as painful as the pleasure of gains of similar magnitude. This probably averages out, with losses happening in one of four years in the US, but more frequently in other countries. I believe this pain level should also be addressed in terms of age. The older the individual, the less time they have to fully recover. Many of us rely on gains from investments that have been successful in the past, and our faith in them builds over time, so when they fail it is more destructive.

 

This is one of many reasons that relatively little money flowed into SEC registered “China Funds” this week, even though 13 of them were in the 25 best performing mutual funds. Small-caps pulled ahead of mid-caps for the week, which had performed better this year.

 

Before treating the above as purchase suggestions, I quote from Jaime Dimon “Past Performance is not indictive of future results.” However, I regularly look at investments that have done poorly for a long period of time.

 

Current Environment

Most democracies are unpopular and are favored by a decreasing number of supporters. Even in the US the Ex-President won a narrow victory, benefitting from a significant number of non-voting Americans.

 

With long-term productivity adjusted for inflation, higher than normal interest rates, a decline in the dollar, the near-term outlook is not good. This is perhaps the reason many smart companies are laying people off.

 

Please share your views with me, particularly when you feel I am wrong. I need your help.

 

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Mike Lipper's Blog: It Doesn’t Feel Like a Bull Market - Weekly Blog # 866

Mike Lipper's Blog: Professional Worry Time vs Amateurs’ - Weekly Blog # 865

Mike Lipper's Blog: SPORTS FANS SELECT CABINET & OTHER PROBLEMS - Weekly Blog # 864

 

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A. Michael Lipper, CFA

 

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Contact author for limited redistribution permission.

It Doesn’t Feel Like a Bull Market - Weekly Blog # 866

 

 

Mike Lipper’s Monday Morning Musings

 

It Doesn’t Feel Like a Bull Market

 

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

 

If not Convincingly Up, Maybe Down

With most US stock price indexes near their all-time peaks in the latest week, why are only 37% of stocks in the S&P 500 rising? Forty-six percent of the stocks on the NASDAQ market rose during this period. (The NASDAQ market has more speculative stocks, like technology and smaller financials.  While not strictly comparable, NASDAQ volume has risen +15% year over year, while NYSE volume contracted -19%.)

 

Warning Light

Could it be that investors are sensing a coming decline. Looking at other data series, the US dollar may have peaked. The more economically sensitive Dow Jones Transportation Index has also completed two-thirds of a typical reversal chart pattern.

 

Too Much of a Good Thing

Another flashing warning light is the enormous amount of money made over the last 10 years. (Using total return data on mutual funds and index funds, the following categories have doubled their pretax money in the 10-years through last Thursday: Large Growth, Large Value, Small Cap Growth, Small Cap Value, S&P 500, and S&P 400. The range for these averages was between 2.35X and 2.01X. I have added Financial Services funds which gained 3.57X). I believe that in addition to portfolio earnings growing, there has been multiple expansion. P/E Ratios can move up and down faster than earnings. It is this concern that leaves some of us worried.

 

Others Are Worried

The Depression, which many economists believe started in 1933, actually started at least 5 years earlier in the farmland. Agricultural prices were dropping due to imports, which eventually led to the US putting up a tariff wall. Currently, the farming community, their suppliers, and financial supporters are worried. Some in the farming community expect income to drop 25% in 2025.

 

The stock market would be wise to pay attention to high-quality US bonds, whose yields have risen +116 basis points over the last year compared to a rise of +44 basis points for middle quality bond yields.  (Yields up bond prices down.)

 

Stock market investors who know their history should likewise be concerned about farm prices. Historically, the sharpest analysts following these trends come from the 4 major agricultural trading houses. One of these is Cargill, who has just announced plans to lay off 5% of its workforce. A glance at the 2024 electoral college map reveals the red team dominating the middle of the country. A similar situation forced a Presidential change in 1932, which some believe was a contributor to WWII.

 

Have we Entered a New Market Cycle?

Do many people recognize a change underway early in the long march to a different environment? I believe a change may be underway, but I don’t know where we are going.

 

I recognize that beneath the surface the two major engines driving the world are the USA and China. Both are not as healthy as they portray, with productivity doing poorly when adjusted for inflation. One example is the US significantly leading the world in medical spending, while life expectancy trails behind Japan, France, Canada, and Germany.

 

We are not Allowed to Think Creatively

For the most part our governance and educational systems are highly regimented to reproduce exactly what was or is. This has been difficult for me to recognize. Consider the amount of mathematical thinking in this blog, which comes from being taught to learn from the text or copying from the past.

 

Our systems are designed to produce copycats, or at least controllable members. We do not try very hard to generate creativity. In college we were taught what worked in the past. I only had one critical exam in all things management accounting, where 50% of the final test was “What’s wrong with Accounting?”. This caused me to recognize that GAAP accounting is designed to avoid lawsuits, not to help make investment decisions. These lawsuits might be brought against investment bankers and various marketers. The closest I got to seeing this was during a Security Analysis course with the famed Professor David Dodd of the famed Graham and Dodd, but only during one portion of the course. The lesson was a real eye-opener when we turned to valuing a company in bankruptcy. The first thing we were instructed to do was reconstruct the GAAP accounting by valuing what was salable and at what price. Only a portion of the inventory could be sold, and it was valued after disposal cost. Buildings and land could be valued up or down, depending on use. Finally, there was the cost of shutting down, including appropriately taking care of the employees.

 

I never learned to be a DaVinci, but I came close by watching what Steve Jobs at Apple did. (Even though I currently own the stock, I do not recommend ownership, except for very narrow purposes.) What Jobs created and Tim Cook built and marketed brilliantly was creating new uses for existing technology. I suspect much of what Jobs created came from his studies of Asian religions. Today, it is interesting to see a surprising amount of creativity coming from foreign-born people working for US corporations or investment capital.

 

Question: What have you done creatively?  

 

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Mike Lipper's Blog: Professional Worry Time vs Amateurs’ - Weekly Blog # 865

Mike Lipper's Blog: SPORTS FANS SELECT CABINET & OTHER PROBLEMS - Weekly Blog # 864

Mike Lipper's Blog: Reading the Future from History - Weekly Blog # 863

 

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