A Word from Jeff – A Raging Bull Dancing with Tax Dynamite

deep value US companies and beaten down non-US stocksHappy holidays to all!

As I write this in the days before Thanksgiving, the stock market continues to surge to record highs, wave after wave, as if it will go on forever.

It won’t, of course, it never does.

It is astonishing, though, and a great lesson on the fickle nature of short-term market behavior, which itself is really a lesson on human nature.

Just months ago, investors the world around gnashed their collective teeth, predicting more gloom and doom, recessions round the globe, troubled over a stock market so long in the teeth as to appear downright tusked.

And just a year ago, we suffered a deep bear plunge, with the markets down nearly 20% before the bottom on December 26th. This, of course, is the big reason the market’s up so much this year – it started pretty deep in the hole. Instead of a Santal Claus rally last year, we got a Christmas Crash.

What a difference an attitude adjustment makes!

For besides the consensus balance between optimism (now tipped that way) and pessimism, not much in the world has changed.

Investment fashion has simply shifted from risk-off fear, to risk-on greed.

But that’s the way of the market. In the near term, it swings with the net mean mood. In the long term, the mood doesn’t matter.

For those of you still focused on the near term, there is much to beware.

This market is exceptionally long in the tooth. US large cap stocks, the S&P 500 sort, are particularly richly valued, and perhaps prime for a plunge.

Perhaps worse, we sit at the warmup of perhaps the most philosophically polar presidential election of all time. The views on public policy between the parties could not be more different. Impeachment proceedings leaven the explosive mixture. And the Bloomberg bomb has just entered the scene.

For these reasons, and more, we are expecting yet another correction for US large caps, if only for reflex relief if nothing more.

Further out, frothy valuations on many large caps, coupled with the specter of a Democratic tax bludgeoning of corporations and the highly productive wealthy, may signal outright bearish conditions around the corner.

This forecast, while unsettling, does bode well for our favorite style of investing, deep value US companies and beaten down non-US stocks.

We think both of these have very bright prospects for outperformance, even as the economic clouds gather.

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