We have no changes to the model portfolio this week.
It has been a difficult start to 2014 for stock markets, but we are well positioned in our model portfolio, which is overweight bonds (+2% YTD) and gold (+5.1% YTD) and underweight stocks (-2% YTD). The S&P 500 looks set to close the first month of the year with a -2.5% loss and is now trading -4% lower from recent highs. Defensive sectors of the stock market, including utilities and healthcare, are holding up better than the industrial and cyclical names, while transport and technology stocks are showing a mixed performance.
Outside the US, many of the European exchanges are ending the month -2% to -3% lower, while real pain is being inflicted across the emerging markets, where a full blown currency crisis is underway. The Hong Kong stock market is -5.2% YTD, Japan -7.9%, Australia -3.0% Brazil -8.3% and Turkey -8.0%. As the Federal Reserve puts the brakes on quantitative easing, the repercussions are being felt far and wide. Emerging markets benefited greatly as a result of Bernanke's loose monetary policies in recent years. That trend is now turning. Expect more pain if Janet Yellen continues on this course this year.
Economic: On the economic front, news out of the US continues to be mixed. We had solid GDP growth of +3.2% in 4Q2013 and improving consumer confidence numbers (80.7 vs 78.1) in January. However, durable goods orders were disappointing (-4.3% vs +1.6% est.), jobless claims continue to disappoint (348,000 vs 330,000) and new home sales were weak -8.7%.
Technical: From a technical standpoint, although the uptrend is weakening, it remains intact for now. My technical trend indicator closed the week +15 points above its long-term trend. A break lower in my indicator will likely signify an acceleration lower across global stock markets.
Strategy: The stock market remains overvalued, and investor complacency has reached an optimistic extreme. We therefore maintain our cautious stance with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.
Next Update: Friday 7th February 2014