I am writing to extend our warmest greetings and wishes for a Happy New Year. This is the long “awaited” annual letter – in summary version – that reviews 2011, provides our update on recent market activity and our outlook for 2012.
A Year In Summary
2011 was a year of highs, lows, volatility and uncertainty. While the year started opportunistically, with hopes for an accelerated recovery from the great recession, by the end of September, all equity markets were in major negative territory.
- Overseas and commodity markets took it on the chin especially hard and US markets were not immune either. Many factors contributed to the fear that gripped the world’s economies.
- Predictions of a double dip recession in the U.S.
- A collapse of the European financial system
- The default of major European countries on their sovereign debt
- The slowdown in Asia as a result of a European recession
- The shutdown of local governments and the US losing its AAA credit rating as politicians grappled with a soaring Federal debt and calls for austerity measures
- Soaring oil prices, caused by the Spring Arab Revolts that did stop growth in its tracks temporarily
- Fidelity reported that average 401(k) balances declined approximately 12% in the third quarter alone.
- Fortunately, all the negative sentiment that was spawned by these events was met with modestly improving US economic news – hence, there was massive volatility on both the upside and downside in most asset classes.
Our Actions
Against that backdrop we initiated many defensive measures in our client’s accounts.
- We sold our pure commodity exposure in April at a profit
- We took some profits on stocks in June
- Due to the extreme pessimism and potential for “black swans” rising we felt compelled, during the fall, to put a hedge against disaster in play and we spoke with many of our clients directly to discuss it in detail.
We felt that putting the hedge in place allowed us to put cash and bonds back to work in primarily US equity markets.
- Remember, the data still supports a slow, moderate expansion of our economy
- Recent unemployment reports were the best since early 2008
- Consumer confidence and manufacturing also improved considerably
- Retail sales were solid
- The surge in multi-family housing starts was surprisingly good
Finally, we capped off the year with tax selling and repositioning of our infrastructure and recovery investment to a similar opportunity we thought was well positioned for the year ahead.
In the end, we feel we accomplished a primary goal of capital preservation very successfully. The year was not as profitable as the prior two however.
For the record 2011 indexes are as follows:
S&P 500 0.0%
DJ-UBS Commodity Index – 13.32%
Russell 2000 – 4.18%
NASDAQ - 1.8%
Barclays Aggregate Bond + 7.84%
European & Far East Index - 11.73%
MSCI Emerging Markets Free - 18.17%
The Sectors that fared the worst in 2011 were financials, materials, and industrials as worries over double-dip recession and Europe’s financial meltdown hurt those areas. Defensive sectors such as utilities, consumer staples and health care fared the best.
Our 2012 Outlook
So what’s ahead?
- Recently we posted LPL Financial’s 2012 outlook. They see the US economy growing at about 2%, while emerging markets grow faster and Europe faces a mild recession. They feel that US stocks and corporate bonds will post gains while Treasury prices (the beneficiaries of last year’s flight to safety) will fall as the yield on the 10 year rises to 3%.
- However, Goldman Sachs’ forecast is for “Stagnation”. And PIMCO’s managing director, Bill Gross, says “investors must lower their return expectations” and “prepare for bimodal outcomes”. It’s his way of saying anything could happen.
- There are a wide variety of both optimistic and pessimistic outlooks for 2012, but consensus is for continued moderate global growth
We believe LPL Financial’s forecasts are most likely but fully agree that both significant upside and downside scenarios could emerge.
On the first trading day of 2012 Europe rallied but Iran wants a fight and oil prices jumped 4%. US equity and commodity markets were also strong. But day 2? – back to uncertainty.
So …
- It seems most likely that the US Economy will be the engine that pulls the world forward again
- Asia will feel the effects of a European slowdown / recession but will likely continue to grow
- While it is very possible that oil prices could get away, it’s also probable that Iran’s bark is worse that its bite and probable that MF Global’s demise will speed regulation of damaging speculative derivative trading
- It’s also possible that the European currency could dissolve, but it’s more probable that it won’t because of the massive trade benefits it provides European members
- Greece could drop out but that probably would be a positive given where things are currently at
- And yes, while it’s possible that US political gamesmanship could badly erode confidence in a brighter future or our credit rating, it’s more probable it will be toned down because no one wants to be seen as the “bad guy” in this Presidential Election year. And aren’t those US presidential election years usually good for the markets?
In closing, there is an amazing amount of uncertainty and we understand that you want us to keep you informed and want us to help you make sense of the many issues swirling around.
We’ll provide shorter, but informative updates on not just the markets in the year ahead but also on election, tax and estate planning issues.
Let’s not forget that the Bush tax cuts and current estate planning laws all expire this year.
Have a healthy and prosperous New Year.
As always call anytime or contact us through our website.
Your feedback is always welcomed.
Donald J. Miller, CFP®
LPL Registered Principal
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Stock investing involves risk including loss of principal.
