Last week I discussed options (see Note 1 below for a link) based on whether the market declined last week and the length of your investment horizon. The market did not decline and I list the relevant options and have added notes in italics:
- You have a long investment horizon: Continue using your current model portfolio. An investment horizon of roughly 7 years or more can be considered a long investment horizon. You can disregard the guidance to hold Box #2 Cash – simply keep it at your regular amount (e.g. 3%).
- You have an investment horizon shorter than 7 years, and…
- A) You are currently using one of the Onyx mixes: Continue using your current model portfolio. Follow guidance regarding Box #2 Cash.
- B) You are NOT currently using an Onyx Mix. Consider switching to an Onyx mix model portfolio, which tend to be less aggressive and are likely to be more tolerant of a quickly weakening economic situation. Follow guidance regarding Box #2 Cash.
Please contact me with any questions about these options.
- Current Outlook Implied by Current MRI Conditions
- NASDAQ versus DJIA
- Valuation and Political Concerns
These views do not affect the target weights of the model portfolio, but they are consistent with a broad range of MRI conditions and economic variables I review each week. When the MRI conditions change, the outlook will change.
In addition to now having multiple promising vaccines, other factors contribute to optimism for economic growth in 2021. These include government economic stimulus efforts around the world, the US Fed’s promise of low interest rates for the foreseeable future, and pent-up consumer demand from months of reduced spending.
Last week I mentioned that high current stock valuations are a concern. High current valuations could limit additional price gains. However, I believe the price of the DJIA will be supported over the next several weeks by the following factors:
- Rotation of the market to industrial company stocks from technology company stocks. Technology stocks that have done well during the pandemic will underperform those that have lagged as the economy reopens. The tech-heavy NASDAQ has done far better these last months than the S&P 500 or the DJIA. The last 52 weeks of price movements is shown in Figure One below, which is discussed later. I believe the DJIA is likely to close the performance gap with the NASDAQ index over the next few months, with the DJIA moving higher.
- The growing resilience of the DJIA. Several of the MRI for the DJIA are at inflection points and moving to the uplegs of their cycles. In addition, they are doing so at low levels in their cycles, which suggests that these uplegs may last many weeks. The Macro MRI measuring the longest cycle of resilience lasting several quarters or years is at the 29th percentile of levels since 1919 – a relatively low level. And the Exceptional Macro is now present, which is a very positive sign. The Micro MRI, measuring the shortest cycles of resilience, is beginning a transition to the upleg of its cycle at the 20th percentile since 1918. These transitions are taking place now, and, although there can be higher volatility around these inflection points, the upside for prices is greater than the downside based on these readings.
- Weakening US dollar. In my review of the MRI conditions of 80+ indexes from around the world, the potential for a weakening dollar appears to be most imminent factor producing US stock price gains. Over the next several weeks, the US dollar will be more vulnerable to declines compared to other major currencies. As opposed to companies in the S&P 500, those in the DJIA get more of their earnings from outside the US. When the dollar weakens, the value of those earnings increases in dollar terms, which supports higher prices. This factor is in addition to the benefits of a potential end of the pandemic and the expected strengthening of the economic recovery.
NASDAQ versus the DJIA
The tech-heavy NASDAQ index has returned about 45% over the last 52 weeks. The S&P500 has about 17%. The DJIA has returned just under 8% over the same time period. The pattern, especially between the NASDAQ and the DJIA fit a “K-shaped” market recovery, which I described briefly in (link: https://marketresilience.blogspot.com/2020/08/performance-review-nasdaq-valuation.html).
Figure One – NASDAQ, S&P500, DJIA – Return over last 52 weeks
The MRI statistics of the NASDAQ and DJIA index suggest that the DJIA may move higher to close the performance gap. I have already described the growing resilience of the DJIA. It is primed to move higher. The NASDAQ has quite different readings:
DJIA Leg of cycle NASDAQ Leg of cycle
Macro MRI percentile level 29th upleg 65th downleg
Exceptional Macro Yes (new) Not present
Micro MRI percentile level 20th upleg 26th downleg