U.S. Market Leading The Way

We’ve noticed a dramatic shift in the markets since the details of the second Quantitative Easing move by the Federal Reserve was announced in early November. Prior to the election and QE2 announcement, the U.S. market was lagging most of our alternative asset classes. Then suddenly, markets reversed course so that now all of the alternatives lag the U.S. broad index.

The first table is as of October 31, 2010.  The sectors and asset classes owned in the mutual fund portfolio model are marked in green, if they are doing better than the benchmark, or red, if they are lagging.

Notice that the majority of alternative asset classes were going up while the U.S. stock market was slightly down during that period. From our selfish standpoint, at that point our model was doing better than the market, and the vast majority of our holdings were doing better than the benchmark.

Then everything changed. The U.S. market started doing better than the alternatives.

Only global commodity stocks were beating the U.S. market, which was in rally mode. We have been struggling, not because we didn’t own better performing alternatives, but because it has been such a narrow market that it is difficult to be very diversified and not have some laggards dragging down portfolio performance.  The second chart is as of March 31, 2011.

In our case, some of our U.S. stock positions, and our gold and precious metals position, were dragging down performance. We recently sold the position in “All that Glitters,” and since quarter-end our utility and pharmaceutical positions have perked up. The insurance holding remains “under water,” though we haven’t owned it for long and since we purchased it, it has generally kept pace with the market.

Thus far, 2011 has been a bit of a Good News/Bad News sort of market. While we are struggling to keep up with our primary benchmark, the S&P 500 Index, the good news is that the broad U.S. stock market is, for now at least, the best game in town.
 
Douglas B. May, CFA, is President of May-Investments, LLC and author of Investment Heresies .

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