First let's look back at my forecast back in
Feb.
1. Imminent geopolitical event
is the trade talk. If indeed a trade deal is reached by March 1, then the
market will continue rising another 10% easily. If Trump and Xi cannot
reach the deal, it will not be the end of the market climb, but it might be
filled with see-saw sessions till Oct/Nov time when Fed decides to only raise
the rate once
a. What I got right:
i. The first part of the
hypothesis has been proved to accurate. Trade talks have been the most
uncertain trigger points in several market setbacks and rallies thereafter
throughout the year. The market climb did not end. In fact S&P
500 and Nasdaq both rose more than 10% from Feb 16th when the forecast was
posted
ii. Comparison of indices of
Feb 16th closing vs today (Nov 27 closing).
1. SPX: 2732 to 3154,
+15.4%
2. NDX: 7055 to 8445,
+19.7%
3. DIA: 259 to 282, +8.9%
4. RUT: 1574 to 1634, +3.8%
b. What I got wrong:
i. Fed did not raise the
rates – instead it lowered the Fed fund rate three times from 2.25-2.5% to
1.5-1.75%
ii. This rate decrease in
tandem with latest QE from central banks pushed general market to new highs
c. Conclusion:
i. Market goes up on growth
expectations. There is no detrimental
factor to slow down the economy drastically between now and the year end and
even in 2020, creating another benign environment for continued equity market positive
returns
ii. The trade talk has proved
to be extremely challenging, more political driven than capital market
forces. Hence the overall market is more
prepared this time even if there is no trade deal but it does not mean another
pull back similar to
2. Feb fund rate.
Currently the fund rate is 2.5%. Supposedly the Street expects Fed to
raise the fund rate three times. Then Powell came out and became a dove
in December amid the worst month in history. So now everyone expects two
hikes. If the tone is changed again, which is unlikely, then the market
will start turbulence again.
a. This general expectation
in the beginning of the year has proved to be completely wrong.
b. The obvious driving factor
is to keep the U.S. to stay competitive in the trade war with China. China seems to be more resilient in handling
its reduction in export to the U.S. as well as the relocation of multinationals
supply chain bases. I am wondering
whether the Chinese GDP is under-estimated by a factor of two because with a
normal trade partner, this would have caused major turmoil in its economy.
Although with a coherent and apparent strategy to contain China, the White
House has been inconsistent in its messages to the market, partially due to its
evidently publicized infighting, along with the pressure to secure re-election
of a Republican Party incumbent.
3. Other than these two macro
events, the market will be driven by sector rotation as evidenced recently in
consumer products outperforming FAANG stocks. Starbucks and Nike have
higher YTD return than Amazon and Twitter, partially due to the Street's
optimism on the trade deal
a. This would have turned
out to be true if Apply was excluded as an outliner. The FAANG stocks are indeed a tale of two
cities, ranging from negative return in Netflix due to streaming wars from
Disney, Apply, and HBO, to stunning 57% return in the largest cap stock in the
world. Overall an investment made on Feb
18th would yield 4.3% higher return with FAANG than SBUX + NKE. Without Apple, the return is a mere 10.9%,
much lower than SBUX and NKE combined, partially justifying the statement of
sector rotation. The question is whether
this trend will continue.
So what to do now.
4. Don't bet against the
market. Clearly the market has established the uptrend again. UXVY
needs to go.
a. This was absolutely a
right call. I dumped entire 200 shares
UVXY on Feb 27 at the price of 31$ (from a cost of 84$), taking a negative 63%
return. This would have been worsened by
another 16.6$ or 3200$ had I not sold it quickly.
5. Load up Nike and SBUX now
in preparation for the trade deal. Even the trade deal did not happen or
was not as advertised, the market will regroup and go from there. Why,
the downside of a non-deal has been factored in the prices already during the
market dive between Oct and Dec last year
a. This was another good
call. I bought 400 shares of SBUX on Feb
25 at 71.9$ and sold it on Nov 25 at 83.5$, a 22% annualized return. However I did not load up SBUX enough and to
make thing worse, I purchased another 400 shares on September 3 at the peak of
SBUX valuation of 96.42$, almost wiping off almost all the gains.
b. I did not load up NKE
although I had more than 600 shares with some bought back in 2015, which I plan
to evaluate in the next few days.
6. Netflex or not. It is
a hard call. Disney is not a real threat due to its positioning.
The price hike effect will show up in its next earning report and also this
year. So it does not hurt to buy a few hundred.
a. This has also been proved
a good call. All Disney+ debut on Nov 12 did was to settle the nerves of NFLX
investors. The stock has gone up 8.2% in
12 trading sessions since the debut.
7. How much cash to set
aside? It looks like that 2019 will have better return than 2018 and
there is no other real threat in sight. Need to be aggressive this
year. Buy on dips and hold on to the gains.
a. This is easily said than
to be done. I did not spend time on due
diligence until early November.
So
in conclusion, this year so far has been a lackluster year of return as
compared with the market. Thanks to the
index investing in 401 (K) s the return so far is not as bad but apparently
lower than the general market especially when compared with the Nasdaq
index. This raises the probability that
2019 will go down to under-perform the market two years in a row.
One noteworthy development is that I am using IBD Big Cap 20 as the data pool to pick stocks with the latest three being LULU, EW, and INCY. Let's see how this would work.
