Category Archives: Shaping a Portfolio for 2016

Shaping a Portfolio for 2016: the US

December 4, 2015 By in Shaping a Portfolio for 2016, Uncategorized Tags: , , , , 1 Comment

The US is the most straightforward of the investment regions of the world.

We’ve arguably made the best recovery from the deep recession caused by the financial meltdown of 2007-08 (China is the other possible candidate).  Real GDP in 2016 will be close to 15% higher than the previous pre-recession peak.  We’re also unique among major nations in the world in being about to make the first baby steps to bring interest rates up from their present emergency-room lows.

That’s the good news.

GDP growth

The other side of the coin is that the trend growth rate for the US economy is now much lower, at about +2% per year, than it was at the end of the last century.  That’s mostly a function of the aging of the population, something the Fed had begun to talk about, but few had noticed, in the 1990s.

We’ve now entered year seven from the economic low point in late 2009.  So I think it’s hard to make the argument that there’s lots of recession-induced pent up demand still waiting to be unleashed.  As a result, it’s also difficult to make the case that overall economic growth in the US in 2016 will be higher than 2% real, meaning maybe 4% nominal.

S&P 500 earnings growth

Publicly traded companies tend to be the best and brightest of those operating in the US.  Their profit growth should be somewhat higher than the norm, say, +7%.

Two factors suggest that the overall tally won’t be higher than that:

–the S&P 500 provides little exposure to autos or construction, two of the faster growing components of the economy, and

–it’s hard to figure what will happen in the energy sector, which, despite its recent poor performance, still accounts for 7.1% of the S&P 500 index.

in a perfect world, growth could be higher, but…

Growth could be substantially higher than that, were the two major political parties not so economically dysfunctional.  Partisan bickering an patronage politics probably subtract 1% from the country’s growth potential.   Arguably, Washington has always been like this and it’s just more noticeable today because of the aging of the population and the fact that inflation is near zero.

look for beneficiaries of structural change

Underneath this relatively calm surface, however, there’s lots of structural change taking place.

–Millennials have replaced Baby Boomers as the largest segment of the population.

–The internet is continuing to create new businesses and disrupt old ones.

–Both Boomers and Millennials are migrating in large numbers–the former toward warmth and away from high taxes, the latter toward large urban areas.

It seems to me that these are the kinds of areas where outperformance will be found next year.  That would imply another year of growth stocks outdoing their value counterparts.

interest rates

The effect of higher interest rates?

The most important point, I think, is that rising rates are unlikely to affect the patterns of out- and underperformance by much (personally, I don’t think there’ll be any effect).

The facts that the pace of rising rates is likely to be glacial and that the advent of the process has been as well-advertised as Star Wars …and over a longer period…suggest than any negative effect on stocks is likely to be mild.

 

 

 

Shaping a Portfolio for 2016: checking my 2015 ideas

December 2, 2015 By in Shaping a Portfolio for 2016, Strategy, Uncategorized Tags: , , , , Leave a comment

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.