Even in a holiday-shortened week, the market managed to rally, closing up three of the four days. Invest By Model portfolios performed well:
Top 20 rallied 2.35% compared to the S&P 500's 1.31% gain, with most of the "beat" taking place on Friday. The strong performance has helped close the gap in December, with the model up 1.88% and the market up 2.13%. The model entered Q3 ahead of the market but is up just 5.39% compared to the smoking-hot 10.08% QTD return for the S&P 500. Top 20 has been repositioned during the quarter and has several bounce-back candidates poised to benefit from the end of tax-loss selling, which now appears behind us.
Conservative Growth/Balanced rose 1.1% this week, well ahead of its 60% stock and 40% bond benchmark, which gained 0.63%. December performance has been robust at 0.8%, 0.24% better than the index, while the model remains modestly behind the bogey for Q4, trailing by 0.78% with a 5.08% return.
As I projected at the beginning of the year, 2013 was great for equities, much more than I had expected. Recall that my original prediction was for 1664 on the S&P 500, though I revised that to 1740 during the summer. It looks like we will close above 1800 - a fantastic year by any measure.
2014 should be modestly higher - my target is 1968. There will be more challenges, and I am highly confident that the 2012 and 2013 experience of never trading at the prior year's levels will not repeat. I expect that the trading will be defined between 1650 and 2000. While the past few years have seen most of the equity returns related to higher PE, that game is getting old. My target assumes an equal mix of PE expansion and EPS growth - hence the less robust outlook (though positive). There is a reasonable chance that growth accelerates a bit, and we will see the market get concerned about rising rates in that case. The reality, though, is that any growth expansion will prove modest.
I will have a more detailed outlook next week...
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I have been offering Invest By Model for over 5 1/2 years. I really enjoy helping investors manage their money so that they can attain reasonable performance at very low costs, but I have to confess that as a commercial pursuit, Invest By Model is an utter failure. This is disappointing, as the long-term performance of both models has been quite strong. We have so few subscribers, that my time isn't justified, yet I have continued to offer the two models and to fully engage myself in sharing my best ideas transparently.
As we approach year-end, I seek your input. I am contemplating several alternatives, including ending the service, pursuing it in a different venue or just keeping it the same but charging more. I would appreciate any input that you care to share with me - you can email me at email@example.com.
Alan Brochstein, CFA