Much Ado About Nothing

- 2011 4th Quarter


As the calendar turned to 2011, most analysts within the investment circle believed that both the market and economy had finally turned the corner from “The Great Recession” of 2008, and while most expectations for the year were not necessarily calling for great market returns, most of the so-called experts were calling for a solid market performance year.

In the December 20, 2010 issue of Barron’s magazine, ten Wall Street equity strategists forecasted what they expected for 2011, and 9 of the 10 predicted the S&P 500 Index would close at 1325 or higher (Barron’s). The S&P 500 Index opened the year at 1257.64, so, to finish the year at 1325, the S&P 500 Index would have had to increase about 5-6%. When we look back at what actually occurred in 2011, we see there was extraordinary turbulence. The Dow Jones experienced 98 daily price swings of over 100 points or nearly 40% of all trading days (BTN Research).  However, this turbulence actually was capped by the Market ending the year as the flattest year since 1970. The S&P 500 Index’s raw value actually finished down, closing at 1257.04, but the total return gain, which includes the factoring impact of reinvested dividends, gave a total return of +2.1% (BTN Research). So, even though the Market had extreme volatility throughout the year, the net effect was “Much Ado About Nothing”.

The intent of this Market Commentary is to explain what happened in the Market for both the 4th Quarter and for all of 2011, and to try to make some sense of what we can expect in the coming year.

The theme since 2008 has been recovery, and while the expectation was that the full recovery would take years, the feeling was that we took a giant step backwards in 2011. When analyzing the positives versus the negatives in the market for 2011, the positive side could really only list one item: Corporate earnings aka “big business”.

On the negative side of the ledger, the list is long and concerning. While unemployment closed the year down at 8.8%, when combining that figure with underemployment as well as those who are off the grid when calculating unemployment, 25-33% are still not gainfully employed. The real estate market continues to struggle, with the average home being valued at what it was worth in 2002.

While the worst natural disaster of 2011 was the earthquake/tsunami in Japan, the biggest “man-made” disaster of the year was of the governmental variety. Although the process of raising the US debt ceiling has been a routine procedure, it was done 10 times in the last 10 years and 78 times in our nation’s history (NY Times), the drama that ensued made the Kardashian Family dramas in 2011 look completely normal. At the last few hours, Congress did ultimately agree to raise the debt ceiling but the media drama it created caused a backlash of reduced confidence in our leaders and systems and sent our Markets in a downward cycle. The following day, we wake up to the fact that Standard & Poor’s downgraded the credit rating of long-term U.S. government debt.

While domestically we were trying to maneuver through our self-inflicted wounds, we watched as the “Euro zone” entered into a recession in the 4th quarter that looks to continue in 2012. While the Euro zone problems started with the bailout of Greece, the fallout has been widespread and will affect many additional countries in 2012. Countries including Italy, Spain, Portugal, France and Germany are dealing with both a debt crisis as well as a banking sector crisis. Unfortunately, we believe that the situation in Europe may continue to get worse before it gets better.

My prediction in 2012 for the most watched story – the US Presidential Election.  Voters are being presented with two completely different and competing visions for the future of our country. In one corner, the Obama Administration is asking for more time to fulfill its 2008 agenda for change. In the other corner, it is the Republicans offering a vision of reduced government intervention and reliance on free market principles to revive the US economy. With the domestic problems we are currently endeavoring, the voters are going to need to decide which politician is going to be able to lead us going forward.

In addition to what is occurring here at home, 2012 is a busy world election year with 29 countries holding presidential elections and 50 countries holding either parliamentary or legislative elections. While we will certainly not discuss each country, and what lies ahead in 2012, one country that deserves mentioning is China. China will see 70% of its top leadership change at the Communist Party congress in October. While all are expecting a smooth transition, it comes at a critical time in world politics. China is again expected to be the main driver for global growth in 2012, and any disruption will likely have a ripple effect on the entire world. I cannot stress enough the importance of China as it pertains to the world growth.  As a result of rising inflation in China, they raised interest rates in 2011. As a result of this, China is vulnerable to an economic slowdown, and as a nation, they are projecting growth at only 7.7%, down from 9.2% in 2011, and 10.4% in 2010. This will negatively impact growth forecasts for the rest of the world.

So, with all of these issues going on both domestically and globally, participants will look to us for answers and help on what they should be doing with their investments. Here are some helpful investment ideas for 2012:

  1. Don’t fight the Fed.  Interest rates will remain low for the foreseeable future.  Do not assume extra risks in chasing higher yields.
  2. Expect a world of market extremes. Expect continued high volatility.
  3. Late in 2012 – revisit Europe.  Travel to Europe now if you are able to and look to invest in it soon. Deals are there to be had.
  4. Civic Duty #1 – Your vote counts.  You will pick the future direction of our country.
  5. Civic Duty #2 – Go shopping! 70% of the GDP is dependent on consumer spending.
  6. Fool’s Gold – Gold is a psychological crutch for panicked investors. Don’t buy gold unless you plan to use it for jewelry.
  7. Do not ignore your financial planning. I met with a participant last week to review his account. We realized it had been 9 years since I had last met with him. He joked that he comes to see me every 9 years whether he needs to or not. My response – HE NEEDS TO. Make sure you are saving and investing the right amount for your current suitability, not how you were a decade ago.
  8. Bulls make money, bears make money, and hogs get slaughtered.
  9. Volatility is your friend (but also your enemy). Remember the tortoise and the hare. Plodding returns with low volatility can outperform high returns with high volatility, and help you sleep better at night.
  10. 2011 saw wild market swings. Expect another wild ride in 2012.
  11. Carpe Diem. Despite the uncertain outlook, opportunities exist. Successful investing demands rational decision-making in times of high uncertainty. Remember what Warren Buffet has stated “Be fearful when others are greedy, and be greedy when others are fearful”.

Lastly, I recommend you proceed with caution in 2012. We are still in a recovery mode, and we need to prepare for the inevitable bumps in the road. Remember that you are investing for your retirement, and by focusing on asset allocation, diversification and risk management, you will be best prepared to navigate through what again could prove to be a treacherous market.

I wish everyone a very healthy and happy 2012, and if we can be of any assistance, please do not hesitate to contact me directly at (216) 595-0700.


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