The S&P 500 rallied sharply, closing near its all-time high and improving by 5.09% in July, including dividends, up 19.62% for the year. Bonds stabilized during the month as well, returning 0.14% but still down about 2% in total return for the year. Here is how the models look:
Top 20 returned 5.71%, which was 0.61% better than the S&P 500, with exposure to smaller companies helping to boost performance. The returns were quite varied, a we had five stocks up 10% or more (two due to recent earnings reports and also including STJ, which we sold) and four stocks down between 0 and -10% (three due to recent earnings reports).
CG/B lagged solely due to its heavy cash position, returning 2.26%, which was .85% behind the 3.11% return of its stock/bond index. Still, it is having a great year. Here, the returns in July had fewer outliers, with only CATO up more than 10% and only INTC down. The portfolio remains quite underinvested, with bonds at 20% (40% would be fully invested and in line with the benchmark) and stocks at 46% (60% would be fully invested).
I have been suggesting that my original forecast of 1664 for year-end 2013 on the S&P 500 is likely too conservative. As the market approaches 1700 with 5 months to go, it's not difficult to imagine that the trends towards PE expansion persist. The earnings numbers, which I had thought might come down as the year progressed, have not. Instead, these estimates continue to suggest more of the same: Modest growth.
The key risks that I see developing are rising interest rates and weaker foreign economies, particularly China and some of the Latin American countries, like Brazil. These actually tend to offset each other, as they take turns being front and center. While I will be sharing my 2014 outlook in October, my initial read is that next year could be a down year for the market. I envision the rest of 2013 being sideways, with perhaps some upward extension to the range pattern forming. The recent move to new highs has been unimpressive to me. With that said, the technicals are not yet flashing any signals to concern me. Valuations remain reasonable, though not cheap. The economy continues to muddle along.
I continue to suggest that bonds will remain under pressure, though I don't expect a big move. As far as stocks, I am raising my year-end forecast to 1740 (15 PE on $116 of S&P 500 projected 2014 EPS). I would expect the action over the balance of the year to be between 1500 and 1800, most likely within a narrow range inside of that one. With this type of outlook, it should be clear that at 1700 I don't intend to chase stocks for the CG/B model, where we have a lot of cash.
As always, I don't have a crystal ball, and my expectations aren't set in stone. I was pretty conservative to start the year in my view, yet my 1664 forecast was actually an extreme outlier at the time. 1740 is just 3.3% higher than the close in July and means a 24% return instead of a 19% return for the year. As a reminder, I am more of a stock-picker than a market-timer. In Top 20, we remain fully invested, so this isn't even an issue for that model portfolio.