Once again, the past quarter saw the market change direction dramatically. This time, happily, the change was strongly to the upside.
Both the Model Mutual Fund Portfolio and the Model ETF Portfolio outperformed their benchmarks year-to-date as of January 31, 2012.
However, the turn to the upside was not strong enough to overcome the weak third quarter of last year. Both model portfolios underperformed for 2011.
The underperformance of both portfolios is largely due to the inferior short-term performance of value stocks and small-cap stocks. Since small-cap and value stocks have always proved superior in the long run, they are emphasized in the model portfolios. As a result, the model portfolios pay a price during the occasional periods when small caps and value stocks underperform. With the recent turnaround in the market, smaller-cap and value stocks have led the way up, and we expect to see that continue.
With an apparent solution, at least short term, to the eurozone problems, foreign equities should be recovering. Emerging markets, which were a top-performing sector for years, were hit the hardest in the 2011 pullback but seem to have regained upward strength.
There are no changes in either of the portfolios.
FMI Common Stock fund (FMIMX) in the Model Mutual Fund Portfolio continues to be closed to new investors. If you hold FMIMX, continue to hold it. If you do not, then create your portfolio from the remaining funds.
Most of the news is positive, and the stock market appears to be in a bullish mode.
There are of course a number of political and economic vulnerabilities, mostly foreign, that could impact the market. I remain somewhat bullish, and my main concern is that more and more advisers are turning bullish.
The average return (since 1932) for the fourth year in the election cycle (which is the actual election year) is 10.3% for the S&P 500, and the index is getting close to that already. Of course there is a lot to make up for from 2011, since the third year in the cycle has averaged 20.7% but 2011 was up only 2%. However last year did escape being the only pre-election year to have a negative return since 1931—but not by much. Congress has been acting a little differently lately, so the usual cyclical influence of government spending is a bit distorted.
We will discuss the Model Mutual Fund and ETF Portfolios again in May.
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