OK, it wasn’t a great year for stocks but we were attacked by the slower local economy, a leadership Canberra crisis, the slump in commodity prices, the related growth problems for China (as well as the related global slower than expected growth), the Fed’s infernal rate rise delay, the worries of a Grexit, the Chinese stock market slide to the tune of 30% in a short time – and we only lost 2.1%!

That’s actually a good omen because if the consensus view was really negative, we would’ve been absolutely trashed. Another positive omen was the performance of overseas stock markets, where a slow global economy didn’t stop stock markets in France rising 9.4%, Japan put on 7.3%, while the European market, as seen by the STOXX 600, was up 6.9%.

The Dow lost 2.3% — who says we play follow the leader with Wall Street? — making it the worst year since 2008! Yeah, but in that year, the stock market lost about 50% and it’s been a great rise for the Yanks since then. The chart below shows the story of how solidly US stocks have surged, thanks to the Fed’s loose monetary policy called quantitative easing, the low greenback, which sent our dollar to 112 US cents, and fiscal rescue packages for the likes of the car industry and big insurers as well as banks.

Now have a look at our S&P/ASX 200 index over the same period of time.

We’re overdue for a better year after two ordinary ones but now we have a looser monetary policy and our dollar is much lower — it was 95 US cents 18 months ago and 85 US cents 12 months ago!

On top of all the negative issues we’ve had to endure, we’ve had to see commodity prices slide. Oil was down around 35% in 2015, while iron ore has dived like Bill Shorten’s political popularity since Malcolm Turnbull became PM!

So what lies for our stock market? And how will I invest?

It was interesting that on the last day of Wall Street before we started thinking about popping champagne for the New Year — winning stocks for 2015 were down and losing stocks were up.

There has been a pattern that big winners in one year can disappoint the next year but Domino’s Pizza here in Australia certainly has beaten this trend.

Also Blackmores has had two good years but 2015 nuked the performance of 2014, so how the company does next year should be interesting.

A loser last year — BHP-Billiton — could be a winner this year and it wouldn’t have to do much at a current price of $17.86. I think the worst-case scenario is priced in involving a slower world economy, a faster slowing China and more oversupply. Even if the company makes $20 next year, that would be an 11.9% gain plus a dividend over 9%, then add franking credits!

This looks like a good bet but even if you get it wrong for two or even three years, it will be a winning play. Yes and even if they cut the dividend, it will be a pretty good dividend.

I think the improving economy (which I’ve been predicting for a year now and the employment and growth numbers have vindicated my positivity) will help bank profits. Also, if the RBA starts raising interest rates later this year, as I suspect, that will help bank profits as well.

I also think the ETF players can punt on the S&P/ASX 200 index. Remember, the chart above shows how we’ve lagged the US stock market and I do like the history of stock markets that show we pass the old all-time high on the index before we crash again.

That said, I do worry about the US stock market that has passed its old all-time high. US economists don’t see a recession next year and expect the Fed to raise rates slowly, which should scare off recessions and market crashes.
I like funds that promise blue chip plays and dividends for cautious investors. They’re nothing exciting but are all weather, rock solid performers. And while they rise slowly in boom markets, they perform well when everyone gets scared.

Good value small caps

I will be scouring for good value small caps and I was happy with iSentia, which one of my experts put us on to in August, which has had a great year. Have a look at the chart.

If you haven’t got the stomach for picking small cap companies, then you should look at specialist small cap fund managers. Remember, however, that when you chase smaller companies for big returns you are ramping up the risk.

Now because we’ve had two ordinary years, it means we should be closer to a better year or a crash and I don’t expect the latter. Most economists can’t see a recession on the horizon and one of these or high interest rates tend to be the big causes for a market crash.

This chart from Vanguard combined with my more optimistic economic view — here and globally — tells me I want a portfolio that does at least as well as the index, which shows between 1970 and 2015 that $10,000 became $772,000! If you played US shares only, you would’ve pocketed, wait for it, $1.3 million!

We know that over a decade history shows we make about 10% per annum out of stocks and half of that comes from dividends. That’s why I lean towards dividend-paying stocks at the core of my portfolio.

I think a good year is due and I will be exposed to benefit from it. I hope you will too and I trust our Switzer Super Report will help you make it happen.