The S&P 500 started off with a jump to new all-time highs, but it spent the month deflating as much as 5% from peak to trough, closing down over 3% in price and near the lows of the month. After a terrible sell-off, bonds recovered somewhat but ended up losing over 0.5% and have returned about -2.8% YTD. Here is how the models look:
Top 20 returned 1.28% in August, which was 4.18% better than the S&P 500, a stunningly strong outcome. The returns were quite varied, with five of our stocks rising in excess of 5%, including one large holding that rose almost 11%, while we had no double-digit decliners but several that retreated by 5-9%. We did exit one name during the month, and the stock we replaced it with rose slightly. We also had a few nice trades, trimming positions that later pulled back and adding to positions that advanced, though some of our additions fell as well.
CG/B lagged, returning -2.17%, which was .24% behind return of its stock/bond index. Still, it is having a great year, well beyond what I anticipated. Here, the returns in August had fewer outliers, including a name we added right before the earnings report and a subsequent decline. Conservative names in general were under pressure, and we had several stocks fall by 4-9%, with only one stock rising more than 1%. The portfolio remains quite underinvested in bonds at 25% (40% would be fully invested and in line with the benchmark) and neutral in stocks at 59% (60% would be fully invested). Being underweight stocks and bonds helped, but stock selection offset this benefit and resulted in very slight underperformance.
OUTLOOK
Last month, I updated my outlook for the rest of the year:
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.
At this point, following some extension of the rise in rates as well as the reversal following new highs in stocks, I want to add to my previous comments. I liked the reversal near 3% for the 10-year Treasury. There is concern over the succession of Ben Bernanke as Chairman of the Federal Reserve Board of Governors, with Larry Summers now being considered when most had thought only Janet Yellen was a possibility. This is going to remain an overhang no matter who is selected, as change is always a reason an excuse for concern. In the end, there are so many other factors that will be of more importance, particularly the pace of the recovery.
With the pullback to 1633, I am more bullish. We are in the bottom half of the 1500-1800 range I expect, though clearly a drop to 1500 would be pretty big. This pullback has been highly rotational, with profit-taking in some conservative stocks that is giving us the ability to add new positions in CG/B. I have several names lined up that I plan to consider. As far as trying to anticipate some levels of support from here, I see 1600 as the next stop (150dma, round number, chart support). Beneath that, 1574 (rising 200dma, summer lows and chart). Finally 1541 (10% correction, 38% retracement of May 2012 to August 2013).
