We have no changes to the model portfolio this week.
We remain cautious in our outlook for global asset markets and continue to recommend a defensive asset allocation in our model portfolio: 20% equities / 50% bonds / 20% gold / 10% cash. With Euro zone government bonds +7% and gold +6% YTD versus global equities only +1% YTD, our defensive position is paying off.
Despite 2014 turning out to be a more challenging year for investors, last week stock markets delivered mostly positive returns, particularly in emerging markets. India rallied +4.9% following the election of the pro-business prime minister, Narendra Modi, who will hold a single party majority government for the first time since 1984. Many of the emerging markets had a positive week despite the political uncertainty surrounding Russia and the Ukraine.
Equity Performance for the Week Ending 16th May 2014:
Economic news was mixed last week. In the US, retail sales and industrial production were weaker than expected, though jobless claims also declined to a 7-year low. Consumer sentiment ticked lower, but the trend remains up over the medium term.
Technical: From a technical perspective, the uptrend remains in place and all dips continue to be bought. Beneath the surface however, smaller cap stocks (Russell 2000) and the former momentum leaders (biotechnology, social media) of this 5-year bull market are lagging badly, falling -9%, -20% and -30% respectively from their recent highs. Under the cover of the popular large cap indices making new all time highs, the smart money is heading for the exits, a trait that always occurs near the end of every bull run in stocks. I expect the selling to accelerate later this year and we should be ahead of the game and see a clear breakdown in the technical trend ahead of time. For now, my technical trend indicator closed the week +38 points above the long-term trend.
Strategy: Investor sentiment remains lopsidedly bullish and equity valuations are in the top 3% of all historic bullish readings. This is not a time to embrace risk. We maintain our cautious stance with an allocation in the model portfolio of 20% stocks, 50% bonds, 20% gold and 10% cash.