The U.S. Stock Markets finished quite strongly last year. Our equities ended the year with a better than 30% gain, just shy of the 33.5% return of the Russell 3000 Index (the S&P 500 was +32.4%). The stock market became somewhat frothy as the year went on as evidenced by leadership performance of speculative stocks such as Tesla, Netflix, Twitter and the growth Biotech sector. A normal correction (5-10%) is certainly likely in 2014, but with expected earnings growth of 8-10%, the reduction of risk from Europe, evidence of compromise in the U.S. Congress, and favorable acceptance of Fed tapering, we foresee a market which grows into current valuations.
One of the more controversial and intellectual debates facing investors today is centered around the topic of “diversification.” In the last five year Bull Market, the Winslow annualized return for our All Cap stocks were 24% and for our Small Cap Strategy 32% per year. We will “go out on a limb” and predict that those returns will not be repeated anytime soon. Nonetheless, many individual and institutional investors heeded the advice of consultants and wealth planners, especially after the 2008/2009 market meltdown, and expended a lot of effort diversifying further away from U.S. Equities. While we too believe in diversification, we think this trend went too far and would note that some diversifiers have shown a much higher correlation to the U.S. Market than in the past (i.e. Hedge Funds, foreign stocks and private equity). Our prediction is that investors are going to look at their returns over the last few years and re-balance towards, not away from, U.S. Stocks.