Friday, Dec. 30, was the final trading day for 2011. Stocks closed down for the day, in a shortened trading session, with the Dow losing 69 points, the NASDAQ off 8 and the S&P 500 sliding 5.
The last trading day of the year was uneventful, in stark contrast to a year that witnessed some of the highest volatility in history. Although the major indexes finished little changed for the year, we saw giant swings for the major indexes during the calendar year.
The Dow ended 2010 at 11,577 and ended 2011 at 12,217, a 640-point increase or a 5.5 percent gain for the year. The Dow significantly outperformed the other major indexes, and was the only index to show a gain for 2011. The NASDAQ ended 2010 at 2,653 and ended 2011 at 2,605, a loss of 48 points or a 1.8 percent decline. The S&P 500 ended 2010 at 1,258 and ended 2011 at the same level, with no gain or loss for the year.
The Dow reached a high for 2011 of 12,876 and a low of 10,404, which represented a swing of 2,472 points during the year, or a drop of 1,173 points (10.1 percent) and a gain of 1,299 points (11.2 percent) from when the index started the year.
The NASDAQ reached a high of 2,888 and a low of 2,299 during 2011, which represented a swing of 589 points for the year, or a drop of 354 points (13.3 percent) and a gain of 235 points (8.9 percent) from where this index began 2011.
The S&P 500 reached a high of 1,371 and a low of 1,075 during 2011, which represented a swing of 296 points for the year, or a drop of 183 points (14.5 percent) and a gain of 113 points (9 percent) from where it started the year.
Although this volatility presented formidable challenges for investors throughout 2011, it also offered opportunities for profits as well. I have been maintaining a model portfolio, which is the foundation of all portfolios I manage for my clients, since May 10, 2004 — the MPAM Model Growth Portfolio. During 2011, this portfolio gained 13.55 percent while the S&P 500, the index I use as my benchmark, was flat for the year. Since its inception, the MPAM Model Growth Portfolio has appreciated 201 percent, while the S&P 500 during that same period, has gained only 15.68 percent (I do not include dividends for either the MPAM Model Growth Portfolio or the S&P 500 in these calculations).
My investment philosophy is based on a sector rotational strategy, which simply means that I over-weight, under-weight or zero-weight the various sectors of the economy, depending on my analysis of the economy, stock valuations, etc., to try to identify those sectors that I believe will outperform the market, or that will underperform the market overall. A key component of this strategy is holding, at times, significant amounts of cash, especially at times when I believe the market is overvalued.
I developed my investment strategy over the more than 20 years I have been investing money for clients, and the MPAM Model Growth Portfolio is the culmination of all of my direct experience investing in the financial markets during that time. There have been many challenges in the markets over that period, since May 2004, while this model portfolio has been in existence. The portfolio has consistently outperformed the broader market throughout the past seven years, through the broadest spectrum of market and economic conditions.
Looking ahead, I believe 2012 will be a transition year for the U.S. economy. I also believe our economy will lead the world out of the current recessionary environment, into a more robust recovery, starting in late 2012 and early 2013. Stocks should anticipate better times to come, and I believe will perform exceptionally well in 2012. My target for the S&P 500 during 2012 is 1,500, which represents approximately a 20 percent gain from the current level for the index.
In the current economic environment, and if I am correct about the economic improvement to come, the sectors of the economy that will perform best will be technology, consumer discretionary, industrials and, yes, financials. The U.S. economy is a credit-based economy — we cannot have a sustained recovery without the financial institutions financing it. For stock investors — those investors who have some portion of their total investment portfolio invested in stocks — these four sectors are where the most attractive gains should be generated, if I am correct with my analysis.
Click here for more information about the MPAM Model Growth Portfolio, or call me at 805.898.1400. I have updated the portfolio, which shows the portfolio holdings and performance for every quarter since inception (May 2004). I am very optimistic about 2012 and wish everyone success during the new year!
— Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at craig@craigdallen.com or 805.898.1400. Click here for previous Craig Allen columns. Follow Craig on Twitter: @MPAMCraig.