As we write this a few days before year-end, it looks like 2012 will be a good year for investors. The S&P 500 is up about 12% for the year, and its smaller-cap brethren are up slightly more, with the MidCap 400 gaining about 15% and the SmallCap 600 rising 13%.
The big laggard for the year has been the Dow Jones Industrial Average, which is only up about seven percent. It is unusual for the Dow’s performance to diverge from that of the S&P 500 by so much. Perhaps it is because the Dow includes a much smaller number of stocks--only 30 versus 500 for the S&P. (Another example of the benefits of diversification.) We thought perhaps it is because the Dow is dominated by value stocks, but the Russell 1000 Value Index is up about 15%. Our best guess is that it is because of the math that underlies the Dow index. Unlike most other indices, which are market-cap weighted, the Dow is stock price weighted. And it turns out that several of the highest priced stocks in the Dow were relatively poor performers.
The strong performance by stocks over the past year caught many pundits by surprise. Fortunately, it didn’t catch this investment newsletter by surprise. In the January 2012Turnaround Letter issue, we predicted that the S&P 500 would rise by ten percent in 2012. It didn’t catch most of our readers by surprise either. In the TurnaroundLetter.com poll at the beginning of the year, 19% of those who voted predicted that the S&P would rise more than 10% by the end of 2012, and another 6% said it would rise between five and ten percent. Only 22% predicted that the S&P would fall. Make your own market prediction for 2013 by voting in our S&P poll.
Our other projections for 2012 had mixed results. We got it right (at least based on the S&P indices) when we said that small caps would outperform large caps. Our prediction that high-grade bonds would underperform may or may not have been right, depending on which types of high-grade bonds you look at. And we definitely got it wrong when we said that high yield bonds would underperform. They rolled on to another strong year, with the Merrill Lynch High Yield Master index rising 15%.
Recapping the past year is easy; what about a stock market forecast for 2013? Read the full January 2013 article--including a forecast for the coming year.
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