The S&P 500 made it 4 for 4 in 2012, rallying ever-so-slightly for the week. Here's how the models look as we approach the end of the first month:
Top 20 rose 1.88% compared to the 0.16% rise in the S&P 500. Part of the gains can be attributed to generally better performance by smaller companies, but we had some good action among several names. Our best performer was one of our laggards. Hopefully, the trend is changing there. We also got good performance out of our largest position, a Large-Cap Healthcare company that reported earnings this week. Its guidance was slightly worse than the prior expectations of analysts, but investors were apparently fearing a lot worse. We had another large position do well too, our Large-Cap Financial. Of course, not every stock was working as well as these, but the good performance for the week came from a broad group of contributors. I have a potential new addition for next week, so stay tuned.
Conservative Growth/Balanced moved to an all-time high this week, rallying 0.55% compared to a 0.28% increase for its benchmark (60% stocks and 40% bonds). Our stocks performed well, overcoming our underexposure to bonds, which did well this week. As I have been sharing, my optimism for stocks in general leaves me a bit concerned that it will be difficult for the stocks in this model to keep up with the overall market. So far this year, we have been helped by our lack of exposure to more traditional "conservative" sectors like Utilities, Telecom Services and Consumer Staples, all of which are off to a slow start and actually down so far.
Sector Selector ETF had another great week, supported by strength in Small-Caps (our biggest bet) as well as Emerging Markets. All of the positions (except Financials, which were unchanged after a huge run-up in the past few weeks) beat the S&P 500 this week, with the model up almost 1% compared to the a 0.16% gain for the S&P 500. We have recovered almost all of the underperformance in 2011 (since the launch at the peak of the market in late April) as the model has gained about 1% over the market per week since year-end.
Market Outlook
No change at all in my optimistic view, but I do want to address Fed Policy. The Fed changed its outlook in a material way this week, suggesting that rates would remain extraordinarily low until 2014, pushing out the window a year. This is a game, and a potentially dangerous one, with the Fed having few other policy tools at its disposal at this point. By talking down interest rates, it is trying to encourage capital to shift towards riskier investments than Treasuries. My fear is that the Fed is underestimating the potential for global economic recovery and is placing itself in a box. The risk is that as the economy recovers, the Fed will keep rates too low too long, raising the prospects for inflation. It's too early to adjust one's outlook, as it is likely in my view that the Fed can extricate itself should its commitment to low rates begin to look dangerous. I believe that the only immediate takeaway is that longer-dated Treasuries are risky, with traders perhaps feeling a bit safe pushing rates down given the Fed proclamations.
Articles
- Win Big by Investing Small in 2012 - Seeking Alpha
Regards,
Alan Brochstein, CFA
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