1Q 2017 Review and 2Q 2017 Outlook

1Q 2017 Review

In my first post of the year, I highlighted Artificial Intelligence (AI) as my top investment opportunity for 2017. The companies that I suggested in that post who I believed had the first mover advantage were Apple, Microsoft, IBM, Google, Amazon, Netflix, Nvidia, Tesla, and Facebook. In a subsequent post, I wrote about “The Next Big Idea”, which was self-driving vehicles. Intel made one of biggest mergers of the quarter when they acquired Mobileye at a 30% premium. Mobileye (MBLY) is an Israel-based assisted-driving systems supplier.

I believe that the first trillion-dollar company will be the one that innovates in AI. Technology companies were the market leaders in the first quarter and innovative companies led the way. Money rotated out of small cap stocks due to valuation concerns and into large cap companies. My decision to focus in this area has continued to work well. The person who had a magnificent quarter was Amazon’s founder, Jeff Bezos. He passed Warren Buffett to become the second richest person in the world. His company is now almost twice the size of Wal-Mart!  The lesson here is that the company that captures future earnings is more valuable than the one no longer growing current earnings.

This quarter the S&P 500 gained 5.92% and the Vanguard Total Bond Index finished up only 0.77%. Economic data couldn’t look any better, which is concerning for that very same reason. Investors ignored the sideshow in Washington and focused more on strong economic data. The hot housing market and low unemployment rate has resulted in consumer confidence reaching a 17-year high.

2Q 2017 Outlook

For my friends and family that know me well, know that I don’t like to follow crowds. I’m noticing some worrisome trends emerging that will eventually impact your portfolio. Delusional crowds are forming everywhere I look. Housing, in particular, is exhibiting characteristics of another bubble. Crowds have very short memories. The 2008 housing crash might as well have happened 1,000 years ago.

The crowd forming in the stock market is beginning to look worrisome. Ed Yardeni summed it up best in a blog that he wrote a few weeks ago. There seems to be more interest in seeking out low-cost funds rather than cheap stocks. He went on to write that until something happens to scare investors out of those passive funds, it could trigger either a correction or a nasty meltdown. I couldn’t agree more with his assessment.

The madness of crowds is also playing out in Washington. There have been rallies or marches for or against the president’s agenda. I believe that there isn’t a single person who isn’t frustrated with Washington regardless of their political orientation. The good news is that the uncertainty has yet to have any impact on the stock market.

My entire 2Q outlook depends on how the Trump administration navigates recent legislative adversity. If tax reform doesn’t happen or if there is possible geopolitical confrontation with North Korea, markets are going to go down fast. These types of events are impossible to predict and those that make predictions are usually wrong in the short-term. Getting the timing right is unprofitable.

I’m going to continue to focus on investing in innovative companies that are developing autonomous vehicles, social media, the cloud, and artificial intelligence. I have one eye on Washington, and the other on corporate cash flows. The right call over the past 8 years has been to invest in high quality businesses that are either generating high cash flows, paying dividends, buying back shares, and/or growing revenues. When this formula stops working, then I’ll reevaluate.

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