This year was characterized by a conflict between strong fundamentals and perceived risks. After a 32% gain in the S&P 500 last year, many observers were puzzled by the equity market’s continued strength. The financial media was filled with predictions of a correction, with some permanently-bearish “experts” predicting a 20%-30% downside, or more. Instead, the S&P rallied by more than 15% in 2014, interrupted by only short-term selloffs in January and October, reminding investors that equities are, in fact, volatile.
What keeps driving the market to new all-time highs? At Model Capital, we believe that fundaments drive markets, not geopolitics or technical indicators. We use our fundamentals-based tactical model to determine what factors “matter” for the equity market going forward, and to measure the effect of these factors. Economic factors have been strong this year – for example, in the past 40 years, jobless claims were at the current low levels only once, in 1999-2000. U.S. GDP expanded at a 5% annualized rate in Q3, and has now experienced the two strongest back-to-back quarters of growth in 11 years. Earnings growth was above 7.5% in three of the last four quarters. Based on fundamentals, our model’s return forecasts for U.S. equities was positive this year, which dictated that we keep our tactical investment strategies in risk-on stance.
Model Capital Management LLC is a tactical investment manager. Please review the following pages for more information on Model Capital’s unique approach to tactical investment management and our tactical investment strategies.