Greater Expectations
JANUARY 17, 2012
The US stock market was essentially flat for 2011, although the journey was anything but a straight line. After rising slightly over 8% in the first half of the year, the S&P 500 dipped 20% from its high, only to rise up to right where it started. While this represented the smallest annual change in US history, there was plenty of opportunity for active managers to deliver positive returns. Tellone Management Group was able to smooth out account volatility and increase client wealth by buying and selling ETFs, quality stocks and bonds, and precious metals.
Looking forward, we expect a good first quarter for 2012. On the economic front, news has been encouraging as of late. Slowly but steadily, employment and housing have improved, with jobless claims recently hitting its lowest reading since April 2008 and homebuilders increasingly upbeat about the sector’s recovery potential. Leading indicators have also remained positive. This improving data has faded away the fears of another recession hitting the United States in the near-term.
While a flat market for 2011 may seem undesirable, it handily beat global returns. Virtually all major overseas markets were down more than 10% in 2011 on worries about European sovereign debt (Germany down 14.7%, France down 17.6%, Euronext 100 down approximately 15%), a slowdown in Asian growth (Hong Kong down nearly 20%; China down 21.7%; Taiwan down 21.2%, India down 24%), or the impact of natural disasters (Japan down 17.3%). While in some cases the losses may have been overextended, the yearly returns clearly depict economic concern worldwide. Furthermore, the European crisis continues without a true end in sight. Of course, the US economy has become less reliant on Europe, which now accounts for less than 18% of US exports, down from 23% just two years ago, as stated by the US Census Bureau. Emerging economies now seem to be the drivers of global growth and strong US exports to the developing world are one main reason that a recession in Europe would not derail the United States recovery. According to a Kiplinger report, “from now on, the growth rates of China and India will be much more important to America’s economic prospects than the growth rates of Germany and Japan.”
With 2012 as an election year, the biggest domestic risk appears to be politics. As we saw in 2011, Republican and Democratic representatives are at a standstill in many key issues. While negotiations will continue, any real action will most likely come post-election. Unfortunately, these stalemates diminish consumer and business confidence by limiting important strategic decisions that are reliant on political decision making. As the election season heats up, we expect health care, the tax system, and the federal deficit to be key issues. What this means for investors is volatility in the market. Political wrangling and uncertainty may negatively impact stocks, but we do not see this occurring until April/May of this year.
Seeing as developed nations are in much more trouble and emerging markets are too volatile for a majority stake of portfolios, US stocks appear to be the go-to investment at this time. Despite our unenviable political climate, individuals and corporations from around the world will look to invest in the United States due in large part to the nation’s extremely accommodative Federal Reserve policy, entrepreneurial spirit, and highly developed capital markets. Additionally, from a valuation perspective, US equities look very attractive. Corporate profits on a quarterly basis, adjusted for inflation, increased 46.6% in 2011. This coupled with relatively unchanged prices means that Price-to-Earning levels have decreased (each dollar of stock purchases more company earnings). In a post-Great Recession world, US companies are much better prepared financially and have extra cash on hand. We see this as an opportunity to continue acquiring plenty of quality companies with stable and significant dividends. Additionally, with the European Financial Stability Facility losing its AAA credit rating from Standard & Poor’s, the dollar will continue to reaffirm its role as an international safe-haven currency. Yields should remain at record lows for the foreseeable future, although price appreciation potential in the securities is severely restricted.
At this point, we believe that the first three to four months of the year will be good, potentially taking us up to the 1370 level on the S&P 500. Caution will be warranted and we will continue to utilize hedging strategies and take profits over the period of May-July. We expect that this year will be a good one in the market and wish all of our readers a happy and healthy 2012.
