that's it for us this week. for the latest updates, be sure to follow me on twitter, facebook and instagram. i'll be back next week right here on "the wall street journal at large." thank you very much for joining us. ♪ jack: welcome to "barron's roundtable" where we get behind the headlines and prepare you for the week ahead. i'm jack otter. it's a brand new year and a brand new decade. what can we expect for the markets in 2021? and later, diversification is the cardinal rule of investing, but your portfolio may not be as diversified as you think it is. we'll show you what you need to know. we begin as always with what we think are the three most important things investors ought to be thinking about right now. despite the chaos in washington, the markets hit new records. here's what investors are watching. big banks will report earnings next week, and they may not be as bad as expected.

what we can learn from the numbers. and you're excused if you didn't notice all the news out of china this past week. we look at the uncertainties of investing in the world's second largest economy. on the round table, ben levisohn, carlton english and jack howe. happy new year, guys. quite a week. ben, so "the wall street journal" editorial board gave what i think was the most succinct summation of the week's events. i'm going to read it very simply, the leader of the executive branch incited a crowd to march on the legislative branch. that's a pretty shocking thing, and yet the markets just kept on marching to new highs. >> that's right, jack. and for a simple reason. as terrifying as that was to watch from my home, it's not a market event. the market is really looking at things, and they're trying to figure out what does it mean for the economy, what does it mean for earnings and cash flows.

it looked at that event and said those things are going to continue to be fine or to continue to improve. and so it basically dismissed it even as -- and i know i was rivetted to my screen. and so, and there's another political event, the election in georgia, and that had had a little bit more inpact on the markets. there had been predictions that the democratic victory with both those seats in the georgia senate race would cause the market to crash, and it didn't. i think the market just calculated with such a narrow margin really there with the vice president breaking the tie, i think it might get more stimulus, but tax hikes, that's going to be a little hard harder. the market is making a calculated guess that these things aren't going to cause it to have a problem with earnings and the economy. jack: one quick question. the market did seem a little bit spooked on friday morning before

recovering. what was going on there? >> i think it was two things. one is west virginia senator manchin. the reports that he wasn't going to green light any stimulus, further stimulus are checks. and he later came out and clarified that he'll look at anything that comes in. so it wasn't quite as black and white. and the other was the fed. there's concern that the fed might start curtailing its bond buying, and this is something that helps stimulate the market. and the bigger concern is when it starts curtailing those bond purchases, then rate hikes can't be that far behind. and so there's some talk both in the fed minutes and some fed speaks mentioned it x i think that spooked the market a little, maybe just put the brakes on a tiny bit. overall, the market finally did, it dismissed it and all the a major indecks closed record highs -- indexes. jack: carlton, time for you. before we get to the stock stuff the, i want to congratulate you. this show marx your one-year

anniversary with us. thanks for tolerating all these guys. i know that's not easy. [laughter] look, earnings coming up next week, what are you learning from for? >> you guys are a fun bunch. a lot of analysts are projecting across the board earnings will be down around 12 president, sales down around 6 president. you hear this -- 12%, 6%. most of the time i roll my eyes when i hear that, but i think for this year or for this quarter that actually is the case. as long as companies are showing they have that continued momentum to navigate through the economic recovery, whatever in the fourth quarter will be forgiven, but it's really what management saying about 20213 and 2022. jack: and i know you're looking at those banks. what do you see there? [laughter] >> yeah. friday is going to be really busy for me. jpmorgan, citi and wells fargo. the banks have been improving over the last two months thanks

to the economic recovery, thanks to the yields steep. ening. what we'll be looking at is basically, you know, some of this margin pressure from low interest rates that should start to improve. the banks should have been able to, you know, reprice following that. we're going to be looking at the outlook on credit. banks set aside billions for potential loan losses. we may see relief coming a little bit in the fourth quarter, but that would be on the back half of the year. so you want to see what management is saying about that. jack: thanks, carlton. jack, i want to pith to china. there was the nysu listing and delisting, then relisting, trump maybe saying americans would not be allowed to invest in alibaba or ten cent, but everyone was asking where is jack ma. >> yeah. it's not often that a guy worth more than $40 billion goes missing. i mean, the last people heard from him was october. he gave a speech. he compared china's state banks

to pawnshops which probably wasn't super flattering for them. and suddenly in november there was an ip o planned for his group, his financial group, and that was suddenly suspended and, of course, around christmas time we heard that chinese regulators were launching an antitrust investigation into jack ma's alibaba group. so i spoke this past week with leland miller, the ceo of china beige book which is a source of economic data for people who don't quite trust the numbers coming out of china. i asked him what was going on. one possibility, he may have been grabbed by the party, and he may be in a darkroom right now. now, jack, i'm not a geopolitical specialist, but that does not sound bullish, i think, for china stock investors. the issue isn't just ma speak out, it's that his ant group is not as regulated as china news banks, bankers in china have been complaining about that.

leland miller tells me maybe he'll resurface in a few weeks or months, and we'll see if alibaba's been restructured and there are all kinds of new rules. it just illustrates this extra layer of risk for people investing in china. jack: coming up, the outlook for the markets in 2021. we weigh in on inflation and the effect of the attack on congress. that's next. ♪ ♪

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muck ♪ jack: should investors focus on the chaos in washington or look for something else? joining me now, citi's chief u.s. ec equities strategist, tobias left cowitch. thank you for coming on the show. >> happy new year. jack: in washington we saw horrible chaos, and yet the

market completely shrugged it off. but still after january 20th, we know that you've got 40% of the country, according to polls, believing the falsehood that joe biden got fewer votes and, understandably, they're angry and even violent about that. if we were talking about an emerging market country here, you and i would say, wow, that's political risk, should we underweight that country's equities. what do you think about the u.s. right now? >> look, i think most people believe the u.s. is still a country of rule of law. there may be dissatisfaction on whoever wins elections, and this is where i raise my canadian flag and say i didn't vote for anybody. this is why the georgia senate races were actually so important in terms of belief there could be incremental stimulus. likely there'll be some higher corporate tax rates and maybe individual for americans. the market looks through turbulence are, we saw it even

in the summer with some of the protests after george floyd and again the market worked through that. jack: so you may be canadian, but i see you're still a colts fan for some reason. [laughter] >> it's more of a nod to the nfl playoffs. jack: you know, listen, i want to ask you about something you've written about in your notes which is something we've talked a lot about on this show, investors starting to cotton to small cap stocks, to value stocks which they had disdained for so long. do you think this rotation is real? >> yeah. we wrote a piece a couple of months ago saying we thought this thing had legs. and really since september 10-year bond yields have been the trigger, if you want to call it, the at list. as they've been moving higher, we've been seeing the small cap index or the russell 2000, that's true if you go back 20 years, it's very much around bond yields, but that's not the only reason. cyclical recovery is likely. this downturn was so different,

obviously caused by the pandemic, and the economic slump in tradition always would have people gravitate towards consumer staples, utilities, health care, and as people still have to eat, take their statins to control their chris roll, but they don't -- cholesterol, but they don't necessarily have to go on vacation, buy a new car. the market's not going defensive in a different way, gaining market share so they could grow in and during the pandemic, they also had -- for generations. so you had this melding of cyclical versus defensive, large cap versus small cap and growth versus value and for the same trade because you picked up mega cap, large cap and you picked up defensive through the balance sheets, for instance. so as you kind of move towards what i would call the vaccine lights at the end of the pandemic tunnel, you could see this continueded move away from the very crowded kind of tech longs. jack: not only could that inform

how individuals want to pick stocks, but you also pointed out that will have an interesting effect on the index. and we put a report of yours in barron's where you said it's easier to pull a sled with huskies than chihuahuas, love that. can you explain what you mean by that? >> sure. big cap names, 27% of the s&p 500 today is tech. if you threw in some of the names sitting in communication services and consumer discretionary, you're probably in the mid to high 30%, what i would call tech or tech-adjacent. and they are the big dogs. they're the ones pulling that dog sled. and if they start to ease off a little bit and you replace them with not just poodles, cocker spaniels and chihuahuas, they don't have quite the pulling power. so it hurts the index to a certain respect. it's a restraint on the index level. but, again, the rotation is pretty profound. jack: you could have a lot of stocks doing well even if we hear that the dow and the s&p are down. speaking of the rotation, one

more interesting thing. you note that hedge funds are starting to cover their shorts in energy and industrials, and coincidentally or not, yesterday bill miller said for the first time since 1986 he was buying energy. is that a play that we should keep our eye on? >> so look, energy's part of that value trade. energy price collapsed briefly, but our energy team's looking at them hiring here. and if you think of it we're in neutral for the energy sector, but i can see people wanting to plait a little bit more. as you and i get around, as corporates get around more in a wildly open economy again relative to where we've been in a pandemic environment as a result of vaccines, immunity, etc., that's an increased demand for energy in the short term that wasn't there before. so that could potentially push it up and, as a result, you get two things happen.

you get inflation expectations going up, and when that happens, cyclicals outperform defenses. jack: yeah. there were not very many cars in the parking lot at the train station this morning, and when those finally fill up, we'll be losing a lot more energy. tobias, thanks so much for coming on. >> my pleasure. jack: coming up, those huskies that are dominating your portfolio may mean you are more at risk than you think even if you think you own a diversified portfolio. we'll explain right after the break. ♪ ♪ hi, this is margaret your dell technologies advisor to listen, is to hear more than what's being said... and offer the answers that make someone feel truly heard. i understand, let's get started call a dell technologies advisor today.

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explains. our colleague beverly goodman joins us to help walk us through how to assemble a truly diverse portfolio. most market returns are driven by a small percentage of stocks, but unfortunately, we don't know which ones those are going to be, so we have to own a lot of different issues. >> exactly, jack. that is the reason for diversification. but as you noted, most people think they buy an index fund and they're kind of done. that's why there's trillions of dollars in s&p 500 and total stock market index funds. but these funds are actually very concentrated, meaning they're heavily dominated by pretty big companies. in september, for instance, five stocks -- apple, microsoft, amazon, facebook and alphabet/google -- made up almost 25% of the index. so if you had $100 in an s&p 500 fund, $25 of that were in those

five stocks, and the rest of your money was spread out over the other 495. that's not diversified. [laughter] jack: but the good news is those stocks did really well, so my $25 turned into 30? why not just sit back and enjoy the ride? >> well, it's true. but they're not to to the only stocks that have done well. one of those big five were among the ten best performing stocks for the year. apple, which did the rest, returned about 75%, but there were 13 smaller companies that beat it. some of them, like l brands, were up more than 100%, but they barely moved the index. so you didn't benefit from bigger gains. it's important to note that diversification is a risk strategy, not a performance strategy. so one of the risks of owning too much of just a few companies is like you noted, jack, you miss out on gains elsewhere. but another more important risk, perhaps, is that when these stocks fall -- which they will -- your portfolio will be hit much harder. jack: go ahead, jack.

>> i can't wait any longer, i've got to know, beverly. these active managers have struggled for so long to beat the s&p 500. now, i know there are people who say don't even try, you can't beat the market, but they're not supposed to stink this bad for so many years. and i wonder if it's because of all of these high momentum stocks in the s&p 500. does this mean since the s&p 500's been so lopsided now that conditions are set for active managers to do better from here? >> i think so. for sure some of them. i mean, you have to understand there are thousands and thousands of actively-managed mutual funds, many of which probably shouldn't even exist because of poor performance, high fees, whatever. active management is always going to look bad in the aggregate, but we at barron's have a good track record of finding managers who can add value, and to your point, i think a lot of them can do quite well especially now since we've started to see a slight but meaningful decrease in the

concentration of the index. so even with the addition of tesla, the top six stocks now make up just 21% of the index whereas in september five stocks made up a quarter of it. so this is exactly when some of those good active managers can really shine. jack: ben, do you have a question? >> i do. hi, beverly. so if i really want to protect myself on the downside, can't i just hold some cash and not worry about the? this. >> ben, you know i love cash. [laughter] but two things here. you generally don't want a fund manager holding the cash for you. they should have just a few percent in cash. you're paying them to buy stocks or bonds, and that cash can be a drag on performance and kind of upset your asset allocation overall. you can keep cash elsewhere many your portfolio as a cushion which can certainly help with your mental health if stocks fall, your overall portfolio number doesn't drop as much. but a portfolio made up of just

those two opposite ends, you know, kind of high flying stocks like tesla and cash that earns nothing and goes nowhere, that doesn't actually constitute a diversifiesed portfolio. a truly diversified portfolio has multiple asset classes. you need to administer assets -- add more assets and asset classes each those that seem riskier like merging markets. those make your portfolio more conservative, not less. jack: we've got to go, beverly. thanks again for coming on. coming up, which of these three tech stocks will do best in 2021, alphabet, amazon or facebook? the answer may surprise you. ♪ ♪ makes it brilliant. the visionary lexus nx, lease the 2021 nx 300 for $359 a month for 36 months. experience amazing at your lexus dealer.

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♪ ♪ jack: jack, helping to weaponize disinformation doesn't sound like a business plan i'd be into in 2021, but you say facebook might be the stock to own? >> if you have too many friends, if you want to lose some of them in a hurry, start telling everyone how much you love facebook stock. i'm not going to tell you that. it's not a popular company especially after storming the capitol building, i think people this congress are saying let's look for ways to tone down the crazy including maybe on social media. but mkm partners an, he recent -- analyst he recently ranked amazon, alphabet and facebook. last year he said amazon was the top pick, and it was the best performer. it gained 76%. this year he said facebook is his top pick of the bunch, it will become an increasingly important play on social commerce and digital payment including through instagram shopping and what's app payments, says the stock is

cheap. it's a spicy call. his call, not mine. jack: two more actionable ideas, ben, a very different company that's really trying to do some good. >> right. it's rutger therapeutics. they have a drug for a terrible disease x they released some data that was really disappointing, and the stock lost half its value. there's still hope for the treatment, and the company has a good with gene-editing platform. i think there's a lot of people think when the stock releases good data it jumps 100%, that's when it's time to buy, i like looking at them after blowups. jack: smart move. and carlton, something in the finance space. >> i am. i'm looking at raymond james ahead of earnings. basically, we're going to see some consolidation in the financial industry. raymond james recently announced two acquisitions, really interested to hear what they have to say how those companies will fit into their plans, and it still trades relatively cheaply. jack: a lot of m&a to come in

that space. to read more, check out this week's edition at barron's.com. see you all next week. wear your masks, be healthy, and we'll be right here on "barron's roundtable." ♪ fox studios in new york city, this is maria bartiromo's "wall street." >> welcome to the program that analyzes the week that was and helps position you for the week ahead. i'm charles payne in for maria bartiromo. coming up in just a few moments, i'll speak with georgia congressman jody hice about the future of the republican party, and then ask andy puzder about the future of capitalism under the biden administration. but first, a dramatic weak in washington. >> we were told that we couldn't win this election. but tonight we proved that, with