The first step in formulating an investment strategy for the coming year is to check back to see how well you did in forecasting what would be happening in the current year.
I thought that the best economy in the investable would be the US, that the EU would begin to rebound from a poor 2015 and that the emerging/frontier markets should be avoided. Ok so far.
I thought that eps growth in the US would be +6% – +7%, that interest rates would remain ultra-low, that PE multiples would neither expand nor contract, and that individual stock selection, rather than industry or sector selection, would be the key to success. Mostly ok.
Actually, if the year had ended on November 1st, my year-ago thoughts would have turned out to be pretty accurate. Yes, I didn’t foresee that Britain would vote to leave the EU, but of course that referendum didn’t need to be called in 2016 and the June date for voting was only set in February 2016. And I didn’t anticipate the January-February market swoon that started the year off. That doesn’t bother me so much, either.
So until the approach of Election Day, I was doing about as well as anyone would have a right to expect. The S&P was up 4% for the year on Halloween–vs. my +6% – +7% for the full year. Interest rates remained ultra-low. It appeared a colorless candidate favoring maintaining the status quo would (barely) beat a tacky reality show star, a political neophyte radiating bigotry and trailing a cloud of dubious business dealings, in the race for president.
Then Donald Trump won the election.
Since then, +4% on the S&P has become +11%. The US$ has risen sharply. Stock picking has become less important than sector selection–favoring energy, industrials, materials, that is, the areas that benefit the most from accelerating economic growth. Tech and dividend stocks have been on the outside looking in. The promise of large-scale infrastructure spending suggests the Fed will be free to raise interest rates next year at a faster pace than I imagined possible. Rates have, of course, already been going up in anticipation of Fed action.
As a result, the A I would have awarded myself two months ago is probably now a B.