European stock markets delivered very solid gains in 2013. The top 600 stocks across the Euro zone rallied +15% in aggregate. The Dow Jones Europe Equity Index gained +18%, while Germany, Italy, Spain and Denmark were all up in excess of 20%. Investor risk appetite has returned as the 2008 collapse fades from memory.
In the shorter-term, we have started 2014 on a softer note. Following declines of -5% or more in January, stock markets are now in the process of re-testing their prior December peaks. If those highs are exceeded, this long-in-the-tooth rally should extend for another couple of months. However, if we fail to make new highs in February, selling pressure should increase. I think it is a 50/50 bet in the short-term as to whether new highs are achieved. It is very unusual for stocks, bonds and gold all to be rallying at the same time and something has to give. This move is unsustainable. The safest play is to remain defensive and wait for a low risk opportunity to present itself. The model portfolio remains invested 20% in equities, 50% in bonds, 20% in gold and 10% in cash.