It’s time again for me to write a about portfolio positioning for next year.

As usual, step one is to look back to my conclusions for the current year, written last December, to see what went right and what went wrong.

 

My bottom line was that I thought the S&P 500 might be up by 7% or so in 2015.  Year to date, the index has risen by only about 2%.

 

last year I wrote that:

–the US would be the best area for earnings growth

–the dollar would rise against other currencies

–interest rates might begin to rise in the US, but that the Fed would be less aggressive than its stated aim of having the Fed Funds rate at 1.5% by the end of 2015

–although rising rates most often cause PE contraction for stocks, that wouldn’t be the case this time

–the EU would show no earnings growth, and emerging markets in Asia would show half their usual vigor

–growth stocks would do better than value stocks.

what went right:

–the US has been the best area for earnings growth

–the dollar has risen

–the EU has stagnated

–the Fed has backed off, repeatedly, from its year-ago comments on raising interest rates

where I slipped up:

My biggest mistake was with energy.  I’ll come back to that in a minute.

I also underestimated how strong the negative reaction by investors to a slowdown in China’s economy would be, something that I thought (incorrectly) was already well understood–after all, China has been making no secret about the structural change it is attempting to engineer for about the past three years.

In general, it seems to me that investors now are less willing to discount future happenings, even when they’re as plain as the nose on your face.  Instead, the market seems more and more to react to announcements rather than anticipate.

Back to energy:

The world oil price was more than cut in half last year, exiting 2014 at around $50 a barrel.

I knew that oil and gas would be a bad place to be for an extended period of time, but I didn’t think much more (maybe any more) about it.  This was a mistake in two ways.

–the oil price is now around $40 a barrel.  Since, at the end of the day, mining commodities stocks are high-beta functions of the price of the stuff they mine,  that’s bad for oil, and gas, stocks.  The Energy sector of the S&P is down 14.5% so far this year.  That has clipped about 1.5% from the gains of the S&P.  I didn’t factor that into my forecast.

–worse, from an accounting point of view, I knew that profit comparisons for energy stocks in 2015 would be awful, since the yearend 2014 price was less than half the mid-year peak.  

The decline in reported profits form energy companies has been big enough to drag down the S&P’s earnings growth rate from 5% or so to around 2%.

Had I anticipated a further fall in the oil price (hard to do), and if I had worked out the implications of the energy company profit declines that were already baked in the cake last December (easy to do), I would have had a more accurate S&P earnings growth forecast.  Had I realized how little other investors were anticipating bad earnings reports from energy companies, I might have been more vocal about not owning them.

Tomorrow:  the US in 2016.