My partner Charlie (who runs the advisory business Compound Advisors) and I have been chatting for a month or so about the possibilities of secular changes in the markets. Charlie put together a great post on the changes that have my attention. It begins:
The most significant investing trends over the last 10 years can be summarized as follows…
1. Large Caps over Small Caps.
2. US over International.
3. Growth over Value.
4. Tech over Everything.
5. Long Duration over Short Duration (Yields Falling, Curve Flattening).
6. Stocks over Commodities.
7. When Covid-19 first hit the US last February and March, all of these pre-existing trends accelerated.
And that made perfect sense.
The narrative: a global Depression coming, and during a Depression a) large companies were more likely to survive than smaller companies, b) the US should do better than much of the world given the enormous monetary/fiscal stimulus, c) growth companies would be bid up in a world starved for it, d) technology would thrive as people were forced to stay at home, e) bond yields would plummet as deflationary pressures took hold, and f) commodities would crash from the lack of demand.
These narratives seemed inevitable, and prices were confirming.
But then, with no advance warning, a strange thing started happening. One by one, these trends began to reverse course…
Take the time to read because it is excellent and you will have an idea of the subtle changes we are keeping an eye on, but the gist of the research on these big trend changes is as follows:
When secular trends reverse, no bell is rung, and no one can believe that a shift has actually occurred.
But as narratives follow prices, the longer they are sustained, the more the story changes and the more people believe it.
That has already begun, with the current narrative of a Depression averted, with a) small companies benefitting more from stimulus measures than their larger counterparts, b) global stocks benefitting from a falling dollar and higher global growth, c) value stocks improving with the rise of interest rates and the steepening yield curve, d) technology underperforming as the vaccines and herd immunity will allow people to leave their homes again, e) bond yields rising with inflation pressures mounting, and f) commodities moving higher with a resumption of growth and demand.
When Covid-19 first hit, all of these narratives would have seemed absurd. And yet here we are. Where the story goes from here remains unknown, but the fact that we’re even entertaining these secular shifts is remarkable, and more proof that the only sure thing in markets is that they are full of surprises.
As Trump slouches out of the White House without a tweet, and China ‘putz’ Navarro leaves his perch with China stronger than ever (oh look we found Jack Ma the day you leave), and with the Chinese internet stocks at all-time highs, and Yellen back at the helm at The FED, the economic and financial time bombs of the past Presidency will start detonating making these secular changes of trend even more difficult to read.
in the meantime, this morning Netflix is up $60 to ‘all time highs’ as they surpass 200 million members. Old trends (and 8-80 companies) die hard.
Disclosure – Long Netflix, Tencent, Alibaba