Shaping a portfolio for 2015 (i): a look back at 2014

Yes, we’re barely into December.  But within ten trading days Wall Street will be closing up for the year.  There’s little professional investors can do at this point to influence how their year will pan out, other than to avoid possibly mucking things up through short-term trading.  The accountants will be eager to get a start on closing the books. So they’re happier if accounts don’t trade in the second half of the month.  In particular, they won’t want trades to happen that will hang over, unsettled, into 2015.  As a practical matter, the last two weeks of the year are the best chance professionals have to rest–and virtually everyone takes advantage of the opportunity.

In other words, we’re already close enough to the end of the Wall Street year to draw some conclusions about how the year has gone.

Well, then, how did my Strategy for 2014 hold up?

what went well…

–To start with the most basic, this time last year I thought stocks would produce gains again in 2014, although on a more modest scale than in 2013.  I expected a rise of 7% – 8% for the S&P 500 (not counting dividends), driven by earnings growth and with basically none of the price earnings multiple expansion that characterized 2013.

That has more or less turned out, although earnings have been better than I had anticipated.  Before the start of trading today, the S&P is up by 11.8% since January 1st.

–I thought outperformance would come from a mix of growth stocks, which usually do progressively better as the economic cycle matures, and high dividend payers.  My rationale for the latter was that a yield of 3%+ would be a good start on a total return that would come in at 10%-.  I mentioned MSFT as a particularly interesting company of this sort–but I also suggested looking in Utilities, Telecoms and master limited partnerships (assuming a tolerance for a messy tax return).  MSFT has done extremely well, thanks in large part to jettisoning Steve Ballmer.  Utilities have also been stars, at +21% as a sector ytd.  On the other hand, Telecoms have been caught in the winds of structural change and are little better than flat. The MPLs I’ve looked at have generated income but little in the way of capital gains.

–I also thought short-term volatility would be high for stocks.  It has been   …and I think this will continue to be true in 2015.

and not so well

–I thought that the EU would be showing increasing signs of life—not robust growth, but at least a healthier pulse–as the year progressed.  I also expected the Chinese economy to bottom out sometime in the first half and begin to strengthen in the second.  Both areas have been weaker than I thought.

I was more than bailed out in the case of the Shanghai (+31% ytd) and Shenzhen (+19%) exchanges, which were driven higher by the recent Beijing announcement of a trading link between Shanghai and Hong Kong.  But Hong Kong is flat ytd.  More important, around mid-year, evidence began to emerge that the EU was starting to slow down, not pick up.  Subsequent market and currency declines have made Europe a very tough place to make money this year.  The biggest issue was not how to deal with a rising euro, as I expected a year ago, but how to defend yourself against a falling one.  There was plenty of time to reverse course on the EU, but the fact remains that I didn’t see the slowdown coming.

other stuff

A year ago, I expected Staples to perform well, on the same rationale as MSFT   …but also because the sector has outsized exposure to the EU.  Despite my mistake on the EU the sector has outperformed.  But that’s because of a fall in agricultural raw materials prices.  So this one is a case of better to be lucky than good.

I haven’t been a big fan of Energy for some time.  That’s mostly because the big oils generally get little benefit from rising petroleum prices.  Also, I’ve been too lazy/uninterested to do the work needed to sort out winners from losers in the shale oil/gas business in the US.  Still, I was surprised that the oil price has fallen so far.  This is a net positive for stocks, in my view.  There’ll also be a time to take the contrary view on Energy and buy.  I don’t think we’re there yet, however.

a letter grade?

I’d give myself some sort of a B.  A big mistake on the question of US vs. rest of the world, but offset somewhat by the idea of rmeaining positive on on stocks.




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