Month: December 2020

Authored by Doug Casey via InternationalMan.com,

International Man: Markets have extreme emotions. They can go from irrational exuberance—where it seems everyone is swinging from the chandeliers—to a bottom-of-the-barrel bear market where people don’t even want to look at the business section.

Why is assessing the psychology of the market so important?

Doug Casey: The market, as Warren Buffett has pointed out, can be either a weighing machine or a voting machine. You can make money in the market either way, but you have to recognize which machine is giving you signals.

Although Mr. Market sees and knows almost everything, he pays the most attention to the voting machine, because he’s basically bipolar, a manic-depressive. As a result, not only do you have to deal with the psychological aberrations of millions of other people who are running in a crowd and voting with their dollars, but much more important, you have to deal with your own psychology. You are, after all, part of the market.

The only thing you can control, however, is your own psychology, not that of the market’s other participants. Once again quoting Buffett, “Be fearful when others are greedy. Be greedy when others are fearful.”

It’s a matter of having good psychological judgment. Everybody wants to be a contrarian, and perhaps they think they are a contrarian. But, in reality, it’s hard to be a contrarian.

It’s a bit easier for me because I’ve been wired that way almost from birth, which got me into constant trouble in school. I was always labeled a troublemaker—an enemy of authority. Be that as it may, I just don’t like people telling me what to do. This can be a double-edged sword because one of the oldest sayings in the market is “the trend is your friend.” Most of the time, you actually want to go with the trend.

In other words, you don’t want to swim against the tide. You’ll get beat up and washed away, eventually.

Really, the only time to be a contrarian is when you have good reasons for believing it’s a genuine top or bottom in the market. It makes no sense to be a contrarian 80% of the time. That’s when you ought to go with the trend.

International Man: That’s an excellent point.

What are some of the craziest things you’ve seen at market tops?

Doug Casey: Regrettably, I’m now 73 years old—although, it beats the alternative.

I’ve been interested in the markets and have watched them my whole life, gaining knowledge along the way.

The first wild and crazy market that I can remember personally was in the late ‘60s, when any stock that had the suffix “-ex” or “-onics” at the end of its name was considered an automatic buy. It was a huge tech bubble, like the one today. That was just before a gigantic crash, of course. And the market went nowhere until 1982 when it finally bottomed.

The first market bottom that I was able to take advantage of, however, was gold in 1971. I had read Harry Browne’s brilliant and short book, How to Profit from the Coming Devaluation, published in 1970.

It made all the sense in the world to me for good, logical reasons. I was a kid, just out of college and without much money, but I started buying gold coins and gold stocks. I went from just watching a manic top in the stock market to actually taking advantage of a bottom in the gold market.

Anyway, in the early ‘80s, there was a manic bottom in both stocks and bonds. Even the US government was paying 15% to 18% to borrow. I wrote “Strategic Investing,” which was published in November 1982. It was a stock market book. My big recommendations were electric utilities (they were yielding 12%–15% in current dividends) and the “Nifty Fifty,” a group of stocks that were never supposed to go down—things like Xerox and Polaroid. The Nifty Fifty were the Amazon, Facebook, and Apple look-alikes of the era. But they were crushed about 90% in the bear market that bottomed in 1982.

To give you an idea how grim it was, Businessweek had a front cover called “The Death of Equities.”

Incidentally, the only investment advice that somebody who is knowledgeable about market history really needs is on the covers of popular magazines, like the famous “The Death of Equities” Businessweek cover, which came out exactly at the bottom of the market.

They had another cover in 1984 titled “The Death of Mining,” which of course was the bell ringing for the bottom of the mining market.

You could save yourself a lot of money on financial newsletters if you just go down to the drug store every week and see what’s on the cover of magazines. You don’t even need to read the articles—journalists know nothing about the markets. Their opinions are, at best, contrary indicators. Once every year or two, there’s going to be a tip-off when they’re really bullish or bearish.

Of course, these things may now seem like ancient history. Talking about what happened in the ’60s, ’70s, and ’80s seems like my father talking about what happened in the 1930s and World War II when I was in college. It’s funny how time goes by. I once thought that the things he told me were ancient history and irrelevant, but they’re actually not. I was short-sighted, like most young people. Actually, one of my main interests today is ancient history—Rome and Greece. It helps put things into perspective.

More recent perspectives would include the Internet bubble of 2001, the current tech bubble, and, of course, the real estate bubble that crested in 2007, which was the opening round of the Greater Depression.

Right now, we’re in a stock bubble predictably focused on tech and a bond market hyperbubble. It could be that the current hysteria about the Wuhan coronavirus will be the pin that breaks the bubble. I doubt the epidemic itself will be serious in terms of actual deaths, like the Spanish flu of 1918, for several reasons. That was wartime, for one. For another, we have vastly more medical knowledge now than we had 100 years ago.

What’s likely to be much more serious are second-order effects, such as Draconian laws and regulations, money printing, and general hysteria. It’s not going to be good.

As a general rule, just watch for major tops and bottoms. You don’t have to “do” anything in the market almost ever. You should only act when the market really throws you a fat pitch. For instance, it’s insane the way the public is throwing money at trading services now because of FOMO—Fear Of Missing Out. That’s another giant bell ringing at the top ….

Just try to identify major tops and bottoms, if nothing else. Keep it simple. Right now, we’re at a major top in both stocks and bonds. Get out of the water.

And we’re at a major bottom in commodities—although not in gold. It last bottomed in 2014 at just under $1,100. Before that, in 2001, it was at about $260 when, believe it or not, gold was cheaper in real terms than it was in 1971. But the good news is that there’s clearly a bull trend underway in gold that’s going to take it to a new peak.

In fact, the next bubble is going to be in gold and gold stocks.

International Man: What are some signs that you see right now that we might be near the top in the broad stock market and in the economy in general?

Doug Casey: One sign is the fact that there are a lot of houses in the United States that are going for not just $10 million, but for $50 million, and apartments in New York going for $100 million. That’s a bell ringing at the top of the market.

It’s also evident in the so-called art market, which no longer has anything to do with taste, technical skill, or interesting ideas. It’s now mainly a question of hype and promotion, where embarrassing crap that a kid could put together in a finger painting therapy class is going for millions of dollars. What passes for art today is a degrading affront to intelligence and to civilization itself.

It’s another sign that there’s just too much funny money floating around out there, looking for someplace to go.

One of the interesting things about being in the newsletter business is that I get to see a lot of newsletters. Remember Pareto’s Law. One of its variations holds that 80% of everything is crap. That’s absolutely true in the newsletter business.

Watching what’s promoted in newsletter sales copy may be an even better indicator than magazine covers. As I said earlier, the public wants to buy trading services—a very bad sign. They’ve seen the rich making huge amounts of money. Desperate people with no market or economic knowledge think that some trader is going to give them secrets that will make them millionaires.

Worse is the fact the public will spend big money for tout sheets that seem to promise outlandish returns—100 to 1, or perhaps 473,251%, or the like. The fact that that the public will do that is a sign that there’s a top in the market.

When the bottom of the market comes, not only will people not want to subscribe to newsletters telling them how to get wealthy—they won’t even want to know that the market exists.

They’ll care less about the US stock market than they do about the Uzbekistan stock market. Worse, they’ll hate it, because it will have cost them so much money.

Let me again underline that the only things that I can see that are actually cheap are commodities. I say that because the producers of hogs, cattle, cotton, orange juice, coffee, corn, soybeans, copper—none of them are making any money.

Only the best producers are just breaking even. To me, this is one sign that commodities, which have been at a bear market now for over eight years, are scraping the bottom. If somebody’s looking to make money with their money, the place to look now is commodities.

International Man: It’s also something nobody wants to hear about, which proves your point.

Doug Casey: Absolutely. Nobody wants to hear about commodities.

Everybody wants high tech, software, and things of that nature.

Commodities are, however, the raw materials of civilization. They’re going to come back into fashion.

International Man: Speaking of covers of magazines, earlier this year of The Economist magazine had robotic bulls charging through the cover.

Have we reached peak optimism?

Doug Casey: To quote an old market saying, there is no telling how high a tree is going to grow. We just know that no tree grows to the sky.

When anything hits the front of a magazine, it’s not because the editors are necessarily stupid, although most of them know nothing about the markets. They’re news people. It’s on the front of a magazine cover because people are emotional about it, because they’re interested in it—because they’re involved in it.

That’s why they want to buy a magazine or read about it.

After the market’s been going up as long as it has and as strong as it has, a cover like this on a major magazine like The Economist is a tip-off. A few years from now, it will be as embarrassing as Business Week’s “Death of Equities” and “Death of Mining” covers.

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Doug Casey’s forecasts helped investors prepare and profit from: 1) the S&L blowup in the ’80s and ’90s, 2) the 2001 tech stock collapse, 3) the 2008 financial crisis, 4) and now… Doug’s sounding the alarms about a catastrophic financial event. To help you prepare and profit, Doug and his team have prepared a free special report. Click here to download the PDF now.

Hedge funds that use complex, automatic-trading strategies have been beating human stock-pickers for several years. But that all seemed to change in 2020, as wild market swings in all asset classes, driven by the virus-pandemic, along with an unprecedented flood of central bank money into capital markets has resulted in a year where human-run hedge funds trounced quants, according to Bloomberg. 

Many of these so-called quants – Renaissance Institutional Diversified Alpha, Odey European, QAR Global Stock Selection, and Bridgewater Pure Alpha II are expected to record significant losses this year as the March stock market crash upended their computer trading models. 

Meanwhile, human-run funds logged in some of their best returns in a decade, including Saba, Pershing Square, and Whale Rock. 

John Thaler, an equity manager at Hampton Road Capital Management, said, “stock-pickers had several years of self-inflicted under-performance in the past decade, and the narrative was that computers had defeated humans.”

“Then, the quants hit an air pocket of tough relative performance, and this year, long-short equity managers outperformed by an enormous amount,” Thaler added. 

The bigger winners this year, as we noted, are the “13-year-old Robinhooders” who outperformed everyone. 

Human-Run Hedge Funds Beat Quants in Year Ruled by Pandemic: Bloomberg

And 13-year-old Robinhooders beat everyone: there’s your real headline

— zerohedge (@zerohedge) December 30, 2020

In June, Goldman Sach’s David Kostin wrote that institutional clients were becoming increasingly angry about how their relative portfolio performance fell behind retail investors. 

Andrew Beer, the founder of Dynamic Beta, said designing trading strategies based on decades of numbers “don’t matter today might well be a fool’s errand.” 

“This year should call into question some quant strategies,” Beer warned. 

Even before the pandemic swoon in markets, “quant funds were already starting to struggle under the weight of their own success. Several had amassed tens of billions of dollars in assets, meaning market inefficiencies detected by their high-speed computers tended to vanish before they could make much money from them,” Bloomberg noted. 

Jon Caplis, head of research firm PivotalPath, said, “most quant strategies haven’t made much money in several years.”

Caplis said quants are about 55% of funds that have posted losses since 2016. “These strategies were supposed to revolutionize trading, but they didn’t do that,” he said. 

“We had every possible volatility scenario over the last five years: high vol, low vol, dislocated markets,” said Jay Raffaldini, global head of distribution for UBS O’Connor. Whatever the strategy, if a firm missed the opportunity to make money, it begs the question, “How viable is your business model?”

Another interesting trend is that top mutual fund managers who are handsomely beating major stock averages this year are seeing large outflows as customers gravitate towards cheaper index-trackers. 

Bloomberg Intelligence estimates that actively managed stock mutual funds could report the largest outflows ever this year (approximately $500 billion), despite outperformance versus main equity indexes. By contrast, $200 billion flowed into ETFs with a passive investing structure that replaces human decision-makers.

The recent surge in ETFs is a reminder of retail investor euphoria, which is best captured by the mindblowing inflows into Cathie Wood’s ARKK momentum/growth/”story”-chasing ETF, the ARKK Innovation ETF (profiled here), which just passed JP Morgan “for the largest actively managed exchange-traded fund” with $18 billion in assets and which owns more than 10% of 15 different stocks.

Many quant funds underperformed this year as human stock-pickers reigned supreme, but the real kicker here is that Robinhood traders outperformed everyone. 

Authored by Jim Quinn via The Burning Platform blog,

One month ago I wrote an article – Silent Obedient Consent – about our day in Cape May Lighthouse State Park and my disappointment in seeing so many perfectly healthy young people obediently wearing their face muzzles, as dictated by government bureaucrats,  on a bright crisp autumn day in a 244 acre state wild preserve. I found it sad that so many could be controlled so easily by so few.

Since my state has been on lockdown since our escape to Cape May and the weather has been cold, wet and snowy, we’ve been mostly cooped up in our home prison. The fear propaganda campaign has worked wonders, as our traditional Christmas Eve bash with 50 or so relatives and neighbors, was limited to six relatives. Monday, when I saw the temperature was going to 48 with bright sunshine, I insisted we needed to go to the 3,500 acre Valley Forge National Park to take a long walk.

We have lived eleven miles from Valley Forge Park for the last twenty-five years. I’m a student of history, so living this close to a national treasure, where a ragtag army of farmers showed tremendous fortitude and courage during the brutal deathly Winter of 1777-78, has been an endless source of enjoyment and learning for me, my wife and sons. The walking trails wind through beautiful rolling hills of trees, dotted with soldier quarters as they appeared 222 years ago.

Many an afternoon did we hike up Mount Joy over the mountain to reach General Washington’s headquarters. The museum on the headquarters site is filled with interactive displays describing the tremendous sacrifices made by these men to keep a the hopes of a fledgling country alive. You can’t help but be inspired by the bravery and courage of these men. They left their families and were willing to die for a cause that seemed unreachable. They were willing to sacrifice their lives to gain freedom from tyrannical monarch mandates.

The park rangers have always been friendly and helpful. We signed our two youngest sons up for a program where we took them there every Saturday and they were trained as recruits in the Continental Army with pretend muskets. It was fun for them and they learned about an important event in the founding of our country. Our three boys were full of energy and we would do the five mile trek around the park every time. They would roller blade, scooter or walk, but we always made two stops. One was the battery of cannons, where they would imagine blasting some redcoats.

The other was a huge climbing tree which we assumed was around in 1778 when General Baron von Steuben was drilling his Continental Army recruits, instilling discipline and teaching them tactics. Picturing the past heroic actions of true patriots is easy to do at Valley Forge. When we could get them down from the branches we would set the timer on our camera and take a picture for posterity.

All of my memories of time spent at Valley Forge Park were positive, until this past Monday. Once again, I was aghast at what I witnessed on a sunny brisk winter day. At first I was surprised at the huge number of cars in the parking lot. Many people had the same idea, as indoor dining has been banned by Generalissimo Baron von Wolf for the last month. Our level of enthusiasm for our enjoyable trek through this national treasure of a park waned immediately as we witnessed hundreds upon hundreds of young people, families, bikers, and joggers fully muzzled, as demanded by covid czar Dick/Rachel Levine and dictator in chief – Tom Wolf.

We were going to enjoy our unmasked walk no matter how many compliant sheep we had to pass. Lone bikers, near no one, were masked. Lone joggers were masked. One jogger would pull up her mask when she passed someone and then pull it down after passing. Little kids were masked. Mothers, fathers, teens on dates, and young guys were all masked.

I couldn’t help but think how government school indoctrination had worked wonders on these obedient serfs.

Have years of helicopter parenting created such a pathetic generation of infant like rule followers?

Are they so willfully ignorant they can’t do the basic research to realize masks don’t work, based on CDC studies and the actual case rates in states and cities with mandatory masking and lockdowns?

Based on my observations, at least 60% of these people, out getting exercise and fresh air (not too fresh with a filthy diaper on their faces), were obeying their tyrannical politicians and bureaucrats, or entrapped in fear by a flu with a 99.7% survival rate. We didn’t have the slightest hesitancy in walking next to or passing others resisters (aka anti-maskers, aka granny killers) who chose to live on the edge by breathing fresh air. I never have a problem choosing not to be one of the crowd and not following the lemmings.

The most embarrassing aspect of our afternoon was when fully masked sheeple would take a wide berth into the grass when they saw we were un-muzzled. They treated us like plague carrying super spreaders. This happened at least a half dozen times. When we passed two young fully masked parents pushing a stroller with an infant sucking on his pacifier, I jokingly said to my wife that I should patent a face mask with a built in pacifier. Too late. They already sell them on the internet. We truly must be living in some dystopian Twilight Zone episode.

If it was in my power, anyone who willingly wears a mask in the fresh air should be required to wear this mask. It would represent the infantilization of Americans during this era of idiocracy.

We have a nation of infants sucking on pacifiers while trapped in their cribs by sociopathic parents/politicians. Infants are incapable of critical thought, must be fed to survive, and diapered at all times. Sounds like the majority of adult Americans today, except the diaper is on the other end.

As we passed maskers by the dozens on the walking path, I found myself wondering if any of these people appreciated the irony of the cowardice and dishonor shown to those brave, honorable men who spent a brutal winter battling bitter cold, snow, starvation, typhus, small pox, dysentery, and the threat of attack from the most powerful army on the planet only thirty miles away in Philadelphia. These men faced death every moment of their existence. Meanwhile, our current army of Valley Forge maskers cower from the phantom menace of a highly non-lethal flu bug.

There are hundreds of statues scattered throughout the park honoring the patriots who made the ultimate sacrifice to create a new nation of self-reliant, strong, independent minded, citizens who didn’t require coddling by a massive overbearing Federal government. They just wanted to be left alone to work their farms, raise their families, and live as free men. Statues to honor our current day “heroes” would look like this.

When assessing the state of our nation, it is always a prudent choice to seek out the wisdom of our founding father who led the troops at Valley Forge – George Washington. I think the quote below captures the essence of what has been happening in this country over the last ten months.

The downward spiral crisis in this country is reflected in the apparent trivial submission of a vast swath of the populace to a psychotic belief a thin piece of cloth will save them from a moderately annoying flu that won’t kill 99.9% of Americans. This is a turning point in the history of our country. And not one which will go down in glory, taught in history books as a story of courageousness, fortitude, bravery and common sense.

“The turning points of lives are not the great moments. The real crises are often concealed in occurrences so trivial in appearance that they pass unobserved.”

– George Washington

If General George Washington was alive today, he would be praying for the end of this societal mass delusion and for leaders who were not cunning, ambitious, unprincipled and intent on destroying everything he fought for during those times that tried men’s souls. The subversion of power by a cadre of extremely wealthy globalist traitors has succeeded beyond their expectations.

“However political parties may now and then answer popular ends, they are likely in the course of time and things, to become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the power of the people and to usurp for themselves the reins of government, destroying afterwards the very engines which have lifted them to unjust dominion.” ― George Washington

The future of our country hangs in the balance, just as it did in the Winter of 1777/78. The question is whether we remain sunshine patriots wearing masks as demanded by the monarchy or will we stand now, shed our masks and fight the tyranny engulfing this nation. The choice is ours.

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When historians look back to write the story of 2020, the CCP’s ruthless crackdown on dissent (both on the mainland, and abroad) will  almost certainly be remembered as one of the year’s most prominent themes, and perhaps a major inflection point.

From the skirmishes in the streets of Hong Kong, to the 70+ day lockdown in Wuhan that left residents traumatized, to the international condemnation that followed the Wuhan COVID outbreak, China and President Xi have every reason to double down on their antagonisms of political and economic rivals.

Hence, the Cupertino-based American tech giant revealed on Thursday that it had removed some 39K games from its app store in China at the behest of the CCP. The purge, according to Reuters, is the largest single-day removal in the history of the app store.

Though the two are unrelated, Apple’s decision to remove the games is reminiscent of the company’s feud with Fortnite and Epic Games after the latter tried to circumvent mandatory fees charged within the app store.

Wall Street analysts said the move was hardly a surprise, as Apple continued to close loopholes and kowtow to Beijing’s demands. In this way, Apple is ensuring that it will retain its access to Chinese markets, particularly after Beijing’s recent rousting of Alibaba over some seemingly innocuous comments made by CEO Jack Ma.

In addition to the 39K games removed from the platform on Thursday, Apple also removed another 7K or so non-game apps.

Interestingly, games impacted by the purge include Ubisoft’s Assassin’s Creed Identity, as well as NBA 2K20, according to research firm Qimai. That Beijing is seeking to bar NBA-related games is hardly a surprise, as the league has failed to mend ties with the CCP following a diplomatic spat from the fall of 2019.

Offering some critical context into the scope of this latest purge, data provider Qimai told Reuters that only 74 of the top 1.5K paid games available in the Chinese app store managed to survive.

Circling back to the game removals, analysts claimed that the decision wouldn’t have an impact on Apple’s earnings. But at the same time, they pointed to the lack of foreign game licenses being granted by the CCP as evidence of a growing crackdown,.

“However, this major pivot to only accepting paid games that have a game license, coupled with China’s extremely low number of foreign game licences approved this year…will probably lead to more game developers to switch to an ad-supported model for their Chinese versions,” said Todd Kuhns, marketing manager for AppInChina.

And just like that, Beijing has ensured that any games that don’t receive its explicit approval will be hand

Via DataTrekResearch.com,

Here are 3 stories for your consideration:

Markets Story: Deferring gratification is nurture AND nature.

The Marshmallow Test is one of the most replicated studies in behavioral psychology and all the more notable because it is explicitly designed to assess very young children. Developed by Stanford University researcher Walter Mischel in the early 1970s, here is its basic structure:

• A researcher has a child choose a snack from an assortment of treats.

• The child is then told they can have that item now, or if they can wait a few minutes they will receive 2 treats instead of just one.

• The researcher then leaves the room for 5-10 minutes.

• Some children simply cannot wait; they eat the first treat.

• Others can wait and are rewarded with the second treat when the researcher returns.

In the years after running the first-ever Marshmallow Test study, researchers tracked the first participants’ academic and social progress. Those that had waited for the second treat were much more likely to excel in school and subsequently get good jobs. Those that did not wait saw less positive life outcomes.

As a result, it became established psychological wisdom that some kids are just innately better able to defer gratification. Like natural athletes’ superior physical abilities, they had a gift for seeing the long run and waiting for that second treat. This translated into working harder in school for the eventual payoffs of better grades, which led to acceptance at better colleges, and so forth.

Then a University of Rochester researcher named Celeste Kidd, working in a homeless shelter during the Great Recession, had a novel and hitherto unexplored take on the Marshmallow Test. Perhaps children simply assess the reliability of their environment when they opt for one treat now versus two treats later. A child witnessing the uncertainty of their family’s homelessness would rationally eat the first treat since their world is so unreliable. Kidd crafted a two-part Marshmallow Test that drew the reliability of the researcher into question in the child subject’s mind. Sure enough, these children more often ate the first treat straightaway.

The lesson here is that environment drives the decision-making that underpins delayed gratification. The Marshmallow Test doesn’t just measure innate ability. It also measures the child’s home environment in terms of both its trustworthiness/reliability and how much the adults in his/her life are helping them develop the skill of preferring a greater payoff at a later date.

We see the fingerprints of the Marshmallow Test everywhere in 2020’s capital markets action, an unsurprising finding considering that investing is essentially seeing through the “now” and staying focused on an uncertain “future” reward:

• Like the March 9th, 2009 lows for US stocks, the March 23rd lows this year marked “peak unreliability” in terms of investors’ judgements about their environment. In both cases, fiscal and monetary policy went to work to reestablish market confidence.

  The result is that 2020’s market action post-lows played out almost exactly the same as back in 2009. As we close out the year, the S&P 500 is up 67 percent from the lows. On the same day in 2009, the index was up 64 percent.

• Given the lack of modern-day historical comparisons to forecast the virus’ effect on the US economy, policymakers had to go big – really big – on remedies to reestablish and maintain citizens’ perceptions of their reliability in a crisis. The CARES Act was 2x the size of 2009’s ARRA fiscal package. The Fed waded into the corporate bond market for the first time ever.

• There’s a funny quirk in economics called the “Paradox of Thrift”. It reminds us that GDP growth off a cyclical bottom requires consumers to actually shift their behavior from hoarding marshmallows (i.e., cash savings) to eating them again. This requires them to feel their jobs are secure and their personal finances are in decent shape. As with the prior point, policymakers have to do whatever they can to make consumers feel confident the second marshmallow will show up.

Takeaway: creating a sense of economic stability during a global pandemic did not come cheap and the final bill is still unknown, but the Marshmallow Test clearly shows that people must judge their environment as generally reliable before any recovery can take place. Without that confidence, they consume as little as possible and invest only for the return of their capital rather than a return on that capital.

Data Story: The bottom line is the bottom line.

I think everyone reading this note has a favorite one-chart explanation for why US/global stocks did what they did in 2020. This is ours – actual and projected quarterly earnings for the S&P 500 from Q1 2019 through Q4 2021 – courtesy of FactSet’s Earnings Insight Report.

A few thoughts on this data:

#1: That trough in Q2 2020 of $28.25/share annualizes to $113/share. This is not actually anything close to a “recessionary” level of S&P 500 earnings. It is, in fact, pretty much the average of 2013 and 2014’s results ($115/share) albeit much lumpier (Tech earnings strong, everything else pretty meh).

#2: While the $39.41/share for Q3 2020 is still shaded as an estimate, it’s pretty much a done deal and is actually higher than pre-pandemic Q1 2019’s $38.82. There are many reasons why US corporate earnings power is higher now, ranging from lower interest rates to fiscal stimulus to cost cutting to reduced competition from small businesses. Regardless, this is a remarkable snapback and fits exactly with what you see when you pull up an S&P 500 price chart for 2020.

#3: As for which of those bars matters most to stock prices as we go into 2021, it’s strictly Q3 and Q4 2021’s $45-$46/share and all we know for sure is that those numbers are wrong. Remember: these are based on Wall Street analysts’ single-company financial models. In good times, the Street is too high with their numbers. Coming off bad times, analysts are always too low. Their caution at these points is understandable – estimating earnings leverage off a bottom is hard. The uncertainties of the global pandemic make it doubly so going into next year. That’s why even after the companies of the S&P 500 beat their Q3 2020 estimates by an average of 20 percent, Wall Street only increased their Q3/Q4 2021 numbers by 2 percent.

Takeaway: for all the attention paid to monetary and fiscal policy this year, corporate earnings are the real cornerstone at the foundation of the US equity story. Yes, low interest rates and stimulus checks helped, and will do so again in 1H 2021. However, it is the pace of recovery in 2H 2021 and how that flows through 500 companies’ income statements that will determine where the S&P will go next year.

Disruption Story: Undiversified Returns

A few quick observations to start the last chapter of today’s Story Time:

#1: The S&P 500 exits 2020 much less diversified than where it started the year.

• Technology now has a 27.7 percent weighting in the index, up 4.5 points from December 31st, 2019.

• The only other sectors to gain share were Consumer Discretionary (up 3 points to 12.8 percent) and Communication Services (up 40 basis points to 10.8 percent).

  You can thank Amazon for the former increase (up 78 percent YTD, now 4.5 percent of the index) and Google/Facebook (each up 30-32 pct YTD, 5.4 pct of the index combined) for the latter.

• Financials had the largest absolute decline in terms of weighting, with a 2.6 point drop to 10.3 percent of the index. Energy had the largest relative decline, from a 4.4 percent weighting to 2.3 percent, and it is now the smallest sector in the entire S&P 500.

#2: The best performing super-cap stock in US markets was not in the S&P 500 until December 21st.

• Tesla is up 730 percent year to date.

• That is more than double Etsy, the best performing S&P 500 stock of the year, which is up 314 percent.

• Tesla is essentially unchanged since its S&P addition at the close on December 18th. It is 1.6 percent of the S&P 500 today.

#3: Global venture capital investment in 2020 will be down slightly versus 2019 (-5.7 percent through November, to $246 billion YTD), but the pace of deal flow remains robust.

Here is Crunchbase’s data by month for the last 2 years:

Takeaway (1): these 3 points tell, in reverse order, a story about how disruptive innovation is eating stock indices in much the same spirit as Marc Andreessen’s 2011 observation that “Software is eating the world”. Venture capital is plowing +$250 billion/year into tech-enabled disruption. The best of these investments usually go public. But then, the most widely tracked US stock index will ignore them until they 1) season for a year or so and 2) turn a profit. Once added to the S&P 500, they will join all the other disruptors that have been pulling market cap away from the disrupted for the last decade.

Takeaway (2): even as we embrace disruption as an investment theme, we recognize that Tech + Amazon, Google and Facebook roll up to a 38 percent weighting in the S&P 500 and that is the index’s Achilles heel as we start 2021. If “disruption” treads water all year, the “disrupted” will have to be up 16 percent just to see the S&P 500 rally by 10 percent. If everything goes just right, as we outlined in “Data”, that is certainly possible. But having close to 40 percent of a portfolio in “Tech Plus” – even if it is a widely held passive index – is not a comfortable way to start the new year.

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Sources/Further Reading:

A 2014 Interview with Walter Mischel about the Marshmallow Test: https://www.theatlantic.com/health/archive/2014/09/what-the-marshmallow-test-really-teaches-about-self-control/380673/

Crunchbase data: https://news.crunchbase.com/news/funding-recap-november-2020/

Marc Andreessen’s WSJ piece on software eating the world: https://www.wsj.com/articles/SB10001424053111903480904576512250915629460