The market continued to struggle this week, caught up in ongoing European politics and awaiting the Super Committee report next week. Here is how the models look as of 11/18:
Top 20 had a rough week, declining 5.38% compared to a 3.75% decline for the S&P 500. Weakness was widespread but rather random. One of the stocks we increased early in the week actually rallied during the week, while the other was one of the worst performers. After a modest recovery in relative performance in October, the model is lagging 1.03% in the 4th quarter.
Conservative Growth/Balanced gave up a little ground, declining about 3% compared to the 2.24% decline in the stock/bond index. Again, there were wide divergences in performance, with two stocks rallying but some intense weakness in several others. In two cases, news drove the declines, with the worst performing stock reporting a disappointing near-term outlook when they released earnings. Additionally, our heavy exposure to stocks compared to the benchmark contributed to some of the underperformance. So far in Q4, the model has outperformed its benchmark by 1.12%.
Sector Selector ETF slightly underperformed, declining 3.98% vs. 3.75% for the S&P 500. Our two largest holdings were the weakest performers (Financials and Emerging Markets). Shedding Energy at the beginning of the week proved to be a good move in the short-term, as it was the worst performing sector of the week.
Outlook
Risk levels remain quite high for the market due to uncertainty about how the European debt crisis plays out. This week, Italian and Spanish bonds struggled , with rates stubbornly at decade-high levels near 7%. Stocks fell moderately, again having a really bad day (Thursday), though it wasn't as bad as the prior Wednesday. Somewhat disturbingly, it is becoming clear that there is nowhere to hide, with commodities (including gold) declining and bonds retreating somewhat after strong gains early in the week.
This coming week could see a change to the very tight, consolidating action since late October. We have retraced less than half of the move from the lows to the highs of that month, which seems normal. Pessimism abounds, not surprisingly, regarding the political will of Germany and France to take more aggessive action and the ability of Congress to put forth a "bold" plan (or even a not-so-bold one). Maybe we get lucky and have something to celebrate on either of these fronts at Thanksgiving.
I have to admit concern, primarily because the high interest rates in Italy and Spain signal a potential financial crisis ahead. The Euro has remained relatively calm, for now, but this is likely a technical condition due to repatriation. The equivalent of our Federal Reserve, the European Central Bank (ECB), meets next week, and, absent some aggressive action (following a recent reduction in rates), we could see the crisis overseas accelerate.
I am looking forward to getting past these near-term challenges, which are more about uncertainty rather than some certain negative outcome. I shared my optismism recently about stocks for the next year, but I certainly don't expect the market to rally every day or even week. Still, I view the market as a coiled spring. A removal of the near-term risks to the global financial system shoud lead to a very strong rally. While I continue to expect a strong close to this year as well, the uncertainty of near-term geopolitical events tempers my confidence.
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Have a happy, healthy Thanksgiving!
Alan Brochstein
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