Mike Lipper’s Monday Morning Musings
Contra Messages
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Megaphone Messages
This week is the inaugural of the President, where he’ll deliver his acceptance speech, supposedly on COVID-19. All too much of the media will focus exclusively on these activities. Others may label the speech as the first salvo of the new administration’s redistribution of wealth plans. The shame of the coverage is that there are a number of messages that will get no or little coverage but will impact investors. As a public service, I will briefly discuss a number of these messages that in some respect are contra to the “Happy Talk” many will hear during the week.
Quieter Messages
Short-Term
Job creation needs to adjust to the world that currently exits and will exist in the future, not those before the pandemic. The expected spending releases from the effective distribution and use of vaccines and therapeutics will do nothing to improve productivity, particularly in services jobs. Furthermore, the release won’t automatically lead to the capacity expansion needed to solve bottlenecks. Some of the Biden proposals create new tech jobs, but the entire tech sector only has 2% of the country’s jobs.
Current and future inflation hurts lower income people who have fewer offsets than those who are wealthier. Government data on inflation does not capture rising prices or declines in quantity/quality at supermarkets and bodegas. This week saw a +2.28% increase in the JOC-ECRI Industrial Price Index, bringing the year over year increase to +28.76%. Perhaps a further indicator of the market’s expectation of inflation is the increase in the price of gold mining companies, while the current gold price remains relatively stable.
In the first week of 2021 the average S&P 500 Index fund declined -0.20%, while the average US Diversified Equity Fund rose +0.85%. This brings the year-to-date results for index funds to +1.10% vs +3.95% for diversified stock funds and follows a full year when S&P 500 Index funds underperformed.
Longer-Term
Citigroup’s model of Panic and Euphoria one year ahead has turned negative on the outlook for stocks. Jamie Dimon, CEO of JP Morgan Chase, is more afraid of Fintech activities from “Silicon Valley” and Walmart (*) than domestic banks. Banks are losing share in the financial market. The old regulatory regimes both in the US and elsewhere are not adequate for today’s and tomorrow’s markets.
(*) Held in personal or managed accounts
The bond market yield curve gets steeper each week, suggesting long rates will rise way past 2%. The higher fixed income interest rates go, the more competitive they become with stock prices.
Is 2021 the beginning of the “Last Hurrah” for the two US political parties? In the US and UK, both main parties have evolved historically and in some cases have changed names. With both the Democrat and Republican parties internally split, party discipline is likely to be ruptured. While the public believes internal battles are driven by major policy differences, as they say in golf “drive for show, but putt for dough”. The three critical battles will be on the role of seniority, the value of the right experience, and the role/power of major contributors.
What to Do?
Expect volatility to increase. The NASDAQ price movements may be more insightful than either the Dow Jones Industrial Average or the S&P 500, and certainly more than the Russell indices.
Current prices are important, but less important than long-term future prices. This may be a reason for most investors, individual or institutions, to have the bulk of their money invested for the long-term.
For those with an emotional or psychological need to follow prices, should adopt a trading philosophy focusing primarily on what other market participants are doing. I find investors that on average do poorly are better predictors than those who do reasonably well.
I believe almost all of us are impacted by events and trends beyond our borders. Those marginally investing internationally should primarily invest to hedge their domestic investments, hoping their foreign investments do less well than their domestic holdings. Those investing above 20% of their wealth beyond their borders should be looking for opportunistic investments they cannot find domestically, both in terms of price and quality. Historically, after someone gains wealth they begin investing against their local government, believing that if things go well in their home-country they will have the opportunity to do well too. If the domestic market is troublesome, foreign markets may be attractive to gain stability and opportunity.
I recognize these are controversial views and welcome your thoughts.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2021/01/the-wisdom-of-3-wise-men-weekly-blog-663.html
https://mikelipper.blogspot.com/2021/01/anticipating-topping-us-stock-market.html
https://mikelipper.blogspot.com/2020/12/stud-poker-new-swamp-game-weekly-blog.html
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A. Michael Lipper, CFA
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