My portfolio – March update – Q4 earnings season

Q4 earnings season for 2016 is pretty much done.

According to factset, 99% of companies have reported. We’re seeing a 4.9% earnings growth rate in Q4 2016. That is pretty decent and it’s the first time we’ve seen two consecutive quarters of earnings growth since Q4 2014 and Q1 2015.

The stock market has seen market large price inflation despite not seeing any substantial earnings growth since 2014.  CY2014 S&P 500 EPS was $118.96 and CY2016 will end up near $119.14.

That means that pretty much all of the price appreciation since 2014 has been driven by P/E expansion. That’s not great to see from a long term investing standpoint. P/E expansion can only go so far. It really needs to be backed up by earnings expansion in order to sustain long term results.

I think the 2 months of growth is an excellent start. However, 2017 really needs to show some growth if investors are to get more comfortable around where the stock market is pricing securities right now. There are certainly some proposed changes from the new administration that might spur earnings. However, those are still out in the future and it’s unclear how much of that will actually come to fruition.

The truth is that EPS estimates for CY2017 have continued to shrink. They’re down from $134.50 in September of last year to $131.28 right now. That shows that some of those growth assumptions might be getting pushed off into 2018.

Still, 2017 estimates show 10% growth. That would be awesome to see. However, keep in mind that 2016 projections also called for sizable growth that never actually materialized.

There’s been a lot of comfort around mediocrity in the market the past few years. That’s all due to low interest rates. Low interest rates drive money out of suddenly low yielding alternative investments into rapidly growing stocks.

It seems like that might change soon due to solid economic headwinds. We are likely to see interest rate bumps that might make other investments a bit more attractive. It’s hard to say how that will impact the market in the long term but high yielding securities like REITs will likely take a hit in the short term.

I think rising interest rates are a good thing in the long run. There’s also a lot of hope that things on the earnings side will change soon too. If that’s the case then stocks can keep rising as future stock price growth will be driven by earnings growth.

That optimism is driving the continued rally in the past few months. That rally has been great for my portfolio. I’m happy to see that and I’m hopeful that it will continue. Yet, I can’t help but shake the feeling that we’re getting too optimistic about something(tax/infrastructure plans) that might have less of an impact than we hope.

I’m a long term investor and short term price appreciation isn’t ideal for me. P/E expansion simply means things are getting more expensive. Any additional purchases I make and will continue to make are bought at a price premium. If earnings don’t catch up with prices then there’s the real possibility of mediocre long term returns as prices eventually revert to the mean.

I’m not a market timer so I’m staying in the market no matter what. Like many, I enjoy seeing my portfolio grow every month. I’m also realistic about what price appreciation without growth means for long term returns.

We’ll start getting Q1 results sometime in April. Then, we’ll see if that 10% growth rate is realistic or if the market is being a bit too optimistic. I think Q1 is too early to make a certain judgement. However, it’ll be a time where we get more clarity around this administrations healthcare and tax plans as well. That should give a clearer view to where this market is heading.

With all that said, it’s portfolio time. I was on my way to 400k last month and the market has continued to grow. Let’s see if I’m there this month or if it’ll take another solid month to put me over that milestone.

I changed the colors of the graph to make the three separate categories easier to see.

The portfolio continues to grow and as of today the total stands at $396,944.31!

That’s $12,783 in growth in just one month or a 3.33% increase month over month.

February was a pretty solid contribution month. I bumped up my 401k contributions to a higher % due to my bonus coming in that month. The growth was also helped by solid performance from the market.

The S&P 500 returned 2.44% for the month and we haven’t seen a down month in the market since October.

My taxable accounts grew 5% this month driven by great performance in my individual holdings like UNH and AAPL.

My tax-advantaged accounts were up 2% driven by solid performance in the US markets. They were also helped by a big contribution month. There was some offset by negative returns in the income heavy areas like bonds and REITs.

Cash was up a bit this month as I put some of my bonus aside for future investments. It now makes up 8.4% of my portfolio.

I’m not too far from 400k which is exciting. I should be able to hit that number if the market returns aren’t negative in the next month!

Let’s take a look at the asset allocation.

Here’s the breakdown of each asset class versus target.

  • US Large Cap at 43.4% versus 42.5% target(+0.89%)
  • US Mid Cap at 10.4% versus 10% target(+0.36%)
  • U.S Small Cap at 9.9% versus 10% target(-0.07%)
  • US REIT at 9.1% versus 10% target(-0.92%)
  • International Developed at 15% versus 15% target(+0.04%)
  • International Emerging at 4.9% versus 5% target(-0.10%)
  • US Bonds at 7.3% versus 7.5% target(-0.20%)

My individual securities have performed well as has the S&P 500. That leads to a big shift in my large cap allocation this month making them overweight.

I haven’t contributed anything to my small-caps in a while. Now, we’re slightly below target there due to the out-performance in other areas.

The near certain potential of more interest rate hikes has led to poor performance from REITs and bonds. That means REITs are even further under allocated now. Bonds are below allocation for the first time since I started tracking this(a long bull run will do that to bonds).

REIT and bond buying will likely rule the next few months.

Short term interest rate pressure will continue weighing on REITS and bonds. Lower prices mean good things in the long run as that means higher yields and future returns.

The plan for next month is as follows.

  • Buy REITs and bonds in tax-advantaged accounts
  • Cash pile is at 8.4%, look for value
That’s it for this month. I’m pretty close to 400k which is exciting. I was below 300k when I started tracking my portfolio size at the tail end of 2015! That’s pretty quick growth!. My portfolio has grown by more than I’ve earned in that period of time and that’s pre-tax earnings which is insane! It shows the true power of a bull market once you have a solid base of savings started.
Most of that growth been the excellent market performance. However, consistent contributions certainly help as well. It really shows the power of keeping your money in the market no matter what valuations look like. It really is impossible to predict where the market will go any given year.
Hope your month was as good as mine. I won’t complain about 10k+ bumps two months in a row and I’ll see you soon for a savings rate update.
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