Stocks rallied and bonds weakened in November, extending on the trends that have been in place all year.
In November, the S&P 500 returned 3.05%, while Top 20 actually declined 1.09% and dropped its relative performance to slightly negative in 2013. What happened? The main challenges were in some of the weakest names this year, with end-of-year tax-loss selling hurting one stock in particular quite significantly. Two long-time holdings posted double-digit gains, while some of the newer additions also helped partially offset some of the extreme pressure on a few stocks. Still, half the securities in the model or added to the model declined on the month. In mid-November, we restructured the portfolio rather substantially, exiting two positions and trimming five others in order to add two new names and add to several other prior holdings. We also exited a PLPC, locking in large long-term gains. The current portfolio has a market PE but better balance sheets and projected growth than the overall market.
CG/B basically tracked the 60% stock and 40% bond index during November, returning 2.08%. The advantage over the benchmark remains in excess of 5%. The slight underweight in bonds relative to the 40% neutral weighting was modestly beneficial, as was the overweight of stocks compared to the 60% neutral weighting. The gold miner was a big drag on performance, while a couple of other stocks in the technology sector and one in healthcare also hurt performance. On the other hand, the model scored double-digit returns on two consumer discretionary names. Looking ahead, the model has a lower PE, similar projected growth, stronger balance sheets and a higher dividend yield than the S&P 500, with a substantial cash position that can be deployed into either bonds or equities should prices drop.
OUTLOOK
A month ago I shared my 2014 stock outlook for the first time, suggesting that the S&P 500 could close the year near 1968. I reiterated my view that the market will close 2013 near 1740, though, at this point, that would represent a pretty sharp drop from the November close near 1805. The basic underlying driver of better stocks is the same as it has been - modest EPS growth and slight PE expansion. The forecast assumes 6% EPS growth and a PE of just 16X. From the current level, the forecast is quite modest - just 9% gains in the index and total return of about 11%. Still, this would mark the sixth consecutive year without a decline.
Adding to this outlook, I continue to expect that interest rates will rise gradually. The bond market return in 2013 has been slightly negative, with lower prices not entirely offset by income. While many expect sharply higher rates, this seems unlikely given the slack in both the labor markets as well as other input prices (little inflationary risk). Commodity prices have been soft in 2013, and I suspect that they could see some improvement in 2014 if global economic growth continues to advance modestly.
Again, I don't expect the 2014 rally to look like the previous two years, both of which traded entirely above the prior year's range. The change in leadership at the Fed as well as emerging markets growth should be two issues front and center early in the year, and mid-term elections will capture the market's attention as the year progresses.
