Shaping a portfolio for 2014 (i): a look back at 2013

my take this time last year 

A few minutes ago I looked back at what I wrote in the “Putting the Pieces Together” section of my Strategy last year.

I was pretty accurate on the macroeconomic front, with my guess about how S&P 500 earnings would turn out being  a tad high.  But that’s typical optimistic me.  The stocks in the index now appear to be earning at around a $102 per share annual rate, which is a mere 5% better than twelve months ago.

From that analysis, I concluded that 2013 would be a good year for stocks–but that gains would probably fall short of +10%.

What I didn’t factor in was multiple expansion–the dissipation of the all-pervasive fear of risk that had gripped Wall Street during the stock meltdown of 2008-09, and the return of a soupçon of greed to the investor psyche.  I assumed (read: hoped and prayed) that this would happen eventually.  But I saw no reason to predict the timing of this sea change.  Better just to remain fully invested and therefore be there when liftoff happened.

Calling what happened in 2013 a pinch less risk aversion is probably an understatement.  A 5% increase in earnings per share–with perhaps another +8% in store for 2014–has yielded just shy of +30% (including dividends) so far in 2013 for the S&P.

the plusses for 2013

The biggest story line by far for 2013 has been the just-mentioned return of the market discounting mechanism to more or less normal after four years of extreme risk aversion.  But it wasn’t the only one.

Others include:

–the continuing resilience of the US economy despite periodic scares from Washington policy,

–the EU economy finally navigating the worst of the Great Recession and beginning to show the first signs of renewed growth,

–the amazing upward surge of the Japanese stock market on the hope that severe currency devaluation would deliver sustained real economic growth for the first time in a quarter-century, and

–the gradual reacceleration of the Chinese economic engine as the new administration has taken a firm hand on the controls.

good news, bad news

All these factors are good news, in that they indicate the world economy is on far firmer footing today than it was a year ago.  The bad news (for investors) about this is that all of these plusses are already in plain sight and already fully (in my view) factored into today’s stock prices.

What’s left, then, to go for in 2014?

…not a similar gain to the +30% that 2013 has produced.  Instead, my best guess is that we’ll have the kind of sedate +7% -+8% advance for the S&P that I envisioned for 2013.

If so, outperformance will hinge critically on good sector and individual stock selection.

More tomorrow.

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