As usual, I will keep my annual review short as I am working on a comprehensive annual letter due out in two weeks that will cover the two most important trends for the next THIRTY years (here are two hints: http://goo.gl/QDFQX1 and http://goo.gl/ixJqS7). I have been reading everybody else’s reviews and will link several below with brief thoughts about each.
In general, I believe that 2015 will go down as the year that momentum traders and machines completely took over the stock market as baby boomers emotionally sold anything that wasn’t a large cap stock. This is resulting in lower demand for stocks with the exception of the largest companies. The result is that price extremes for securities are now get even more extreme because momentum traders can push prices around with ease. And momentum works both ways. Lows become priced-for-bankruptcy lows even for companies in little to no danger of going under. Highs go even higher despite silly valuations.
I wrote about the Stampedes of the Momentum Traders several weeks ago. Something to keep in mind is that eventually, momentum has to reverse. It is very likely that many of the stocks that got pummeled in 2015 could be top performers in 2016. It is also very possible that some of the mega-cap names that have held up the market indexes will get knocked off of their perches. It is more important now to be a stock picker than every before.
Make sure you understand how the S&P 500 works. Just because the index is holding up does NOT mean the market is good. The biggest companies carry more weight in the index score. In 2015, the 50 biggest companies accounted for about 97% of all the gains attributed to the index. The other 450 smaller companies, not so much was good. When the mega-caps get whacked, and they will, the index will plummet, but, the smaller companies might barely feel it even as emotional baby boomers finally sell their large caps.
I’ve referenced the baby boomers twice already, now three times. I will be writing an article (maybe two or three) for MarketWatch directed at the baby boomers soon. The general points will be stop being emotional, carry a larger long-term allocation to stocks because you’re going to live a long-time (buy on corrections then hold for years) and understand that “stagflation” is coming back as global growth will never be the same. When stagflation hits, you will have to own stocks that do well with inflation, i.e. energy, food, medicine, high technology, etc… or else you will lose purchasing power rapidly. Owning bonds the next 20-30 years, except for adept trades, might be the worst investment in the history of investments. Interest rates are going to first rise to normal in the next decade as slow growth is finally accepted as normal. We could even see spikes in interest rates in the 2020’s as the debt and money printing chickens come home to roost.
So far in December the stock market hasn’t been good. As I mentioned in the forum I have been trading short positions. I don’t know what the short Christmas and New Year’s weeks will bring, however, if we get that 1000 point down day I expect eventually, use it to buy a few entry positions. It doesn’t hurt to use our “very short list” to set really low limit orders good to cancel and see if anything bites. In general, I set my out of the money limit orders 12% below the week’s low bid and adjust each weekend. If a price blows through that, then wait to see where momentum takes it.
In 2016, I expect that having cash to buy extreme lows on our favorite stocks is still a great game plan. I also think that for those with some trading skills, selectively shorting, buying puts or using inverse ETFs can yield some very good gains.
Here are some reviews I’ve been reading and getting a lot from:
CNN’s Fast Facts about 2015: http://goo.gl/sUyvcT
Barron’s which focuses on the stock market: http://goo.gl/6LXCBC
Peak Prosperity with David Colllum’s annual review that covers markets, economics and life in a pretty witty way: http://goo.gl/okH2p3
GMO’s quarterly letter and other research which isn’t really a review of 2015 but it’s a website you should visit often: http://goo.gl/3sCBLt
IPI Global Observatory Year in Review – Was 2015 as Bad as It Seemed: http://goo.gl/lJNtjl
Brookings Year in review: the top TechTank posts of 2015: http://goo.gl/TTr725
The 2015 Agricultural Year in Review because I think food production is going to be a big topic in coming years as the planet warms up: http://goo.gl/P4RpeV
The Americas Society / Council of the Americas Year in Review: Latin America in 2015 and What’s ahead in 2016: http://goo.gl/RsqDvw
And so you do well on your trivia, the Mr. PopCulture / Mr. Timeline 2015 Year in Review: http://goo.gl/yXcb7s
Keep an eye out for the Financial Times, Economist, Bloomberg, Wall Street Journal, Stratfor and other reviews from top publications too, those should be out there shortly. If you can get something unlocked from the World Bank, IMF or global central banks, try to read those too.
Merry Christmas
Kirk
