Don’t Be Sure as to Impacts
The world, including investors, is searching for clarity regarding future direction, but there are too many turning points that will be reached in the weeks and months ahead. There is also no guaranty as to how the initial readings of a turning point will be interpreted or whether they will impact future turning points.
Multiple Turning Points
There are still some House of Representatives seats not yet decided that will impact the declining legislative power of the majority party. With both the House and Senate approaching a close split in power, their supposed political leaders should be concerned about individual members following their mandates. As individuals, they may not vote the straight party line. Personalities, policies, health problems, power points within chambers and/or parties, and financial considerations could lead to rebellion. (I am doubtful the real reasons will be announced.)
We are at the stage in contested cases where we have graduated from single judge rulings to Appeals courts with three judges or all members of the jurisdictions’ Appeals court. The loser will likely attempt to get the US Supreme Court to hear and decide the case. There may also be simultaneous changes to state laws enacted by their legislators. (Judges, as with elected politicians, may have private views influencing their decisions, although these will not be disclosed.)
After the Final Elections and Court Actions
The path of the economy will probably outweigh the impact of the election. Optimists see a huge expansion coming, with everybody going back to work due to pent-up demand. They seem oblivious to the realities of current shortages in many industrial commodities that will prevent an immediate industrial and agricultural expansion. One measure of this is the JOC-ECRI Industrial Price Index gaining 11.68% year over year due to limited capacity expansion and some closings.
A still bigger concern is the planned distribution of the COVID-19 vaccine. Among the last to be vaccinated will be young, “unskilled” workers, who are a major part of the labor force for the restaurant and lodging industries. A number of these establishments have already closed voluntarily or due to bankruptcy, so it will take some time to bring all these people back to work productively.
The Markets Are Voting
The US stock market is registering a meaningful change in leadership. Thirteen weeks ago the most productive investments were within the S&P 500 and especially in a handful of large-cap technology-oriented stocks. However, for the 13 weeks ended Thursday, 65 of the 104 equity-oriented fund peer group averages beat the average S&P 500 Index fund performance. Last week it was 76 out of 104. In the WSJ’s weekend edition, 55 of the 72 tracked prices rose. However, of the 17 that declined, 3 were major US stock market indices and 7 were S&P 500 sector averages. For most of this year, energy focused funds were the worst performers, but in the latest week, 21 out of the best performing 25 mutual funds were energy related.
Another important indicator of the world sensing a major change is the Euro instead of the US dollar being the most used currency for global payments in October. This was the first time it has happened since February 2013.
The prices of commodities are driven by present and expected future supply and demand. Looking back, it makes sense that gold is the best performing asset class (+22.8%) due to concerns over the value of the dollar. These fears are due to excessive borrowing in the credit markets and the belief that US government spending will monetized through more borrowing, likely causing a spike in inflation. Curiously, the price performance of other commodities year to date through October shows them as being the worst performing general asset class (-22.6%). Goldman Sachs believes commodities are poised for a bull market and some economists are warning of double-digit inflation.
Market Structure Clues
Institutions have reduced cash positions to 4.1% according to one survey. Some view this as a contrarian reading due to there being less readily available buying power. More institutions are also using ETFs as short vehicles.
Many investors invest in China as a region, which includes the Mainland, Hong Kong, Macau, and Taiwan. Taiwan is booming due to sales into the Mainland and the US, and many investors take this as a sign that although the level of harsh words are likely to continue, a military confrontation is unlikely.
There are many trading gaps between closing prices and the price action the following day. Traditionally, these gaps are expected to close before further material progress is expected. As there are so many, I expect a relatively low volume trading market until most gaps are filled.
Going back throughout history to the ancient Greeks, before a major future trend is established, a dialectic process takes place. This process was incorporated in the philosophy of the German philosopher Hegel, who identified the critical elements as thesis, antithesis, and synthesis. I believe we have identified a number of situations where this type of thinking is appropriate: Blue vs. Red, “Growth” vs. “Value” (even though many “value” stocks are mislabeled cyclicals), and Stocks vs. Bonds. I believe we will be entering the third phase, synthesis, shortly. One major brokerage firm’s expectations have already swung from extreme bullishness to bearishness, and are now in the midrange. This currently appears to make sense. We will, however, pay more attention to the selectivity of specific investments rather than marching under particular labels.
What Do You Think?
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.