NEWS

2011-01-10 :: 2010 4th Quarter Commentary - 12/31/10

Looking BackAs we had discussed in our 3rd qtr commentary “looking forward”, the 4th quarter of 2010 moved in the positive direction, with some pullbacks along the way, and December put in the best return of the quarter. Stock valuations were not expensive and things improved in the general economy. The U.S. was the biggest winner in this endeavor as Non-US investments had a negative headwind from the strengthening of the US dollar in the final quarter of the year. Economic indicators demonstrated that the economy was growing but at a tepid pace.

Fixed income did not have a very good quarter with yields moving higher and prices moving lower. This could very well be the slow long term trend, but staying with relatively short durations helped alleviate some of the down side.

Absolute return Hedge funds as predicted had a steady year but underperformed the equity markets. They did however pull out volatility and generally had slightly better returns than bonds last year.

Real Estate: Housing and the Commercial sectors continued to stabilize but there is still no evidence of major growth.

Commodities continued to trade higher in the 4th quarter as economies continued to improve and a general belief in a pent up demand for these goods. Gold continued to reach all-time highs as the fear of government debt and spending creates the lack of a good alternative currency.

2010 YTD

Russell 1000 16.10%
Mid-cap 25.48% Russell 2000 26.85%
Russell 1000 Value 15.51% Mid-cap Value 24.75% Russell 2000 Value 24.50%
Russell 1000 Growth 16.71% Mid-cap Growth 26.38% Russell 2000 Growth 29.09%
MSCI EAFE 4.90% MSCI Emerge Mkts 16.36% S&P 500 15.06%


Looking Forward

We expect the equity markets to continue to move higher this year with possible low double digit returns. There will be some short term pull backs along the way in the 4-6% range. While the economy is definitely improving, we are still expecting GDP to come in around 3%. However, with quantitative easing and new tax laws recently passed, an additional GDP growth of roughly 0.5% is a possibility. Additionally, corporate profits will be judged on a more difficult year over year comps. Our expectation levels for the US Markets long term are more moderate, but still positive returns. The International markets are still in a similar position to last year. Europe does not look as promising as the BRIC countries and Emerging Markets (EM), but in the short term, the EM is a very crowded trade. These situations are fluid and will change quickly depending on: political landscape, austerity measures and currency fluctuations. The job market will improve, but not enough to bring unemployment meaningfully lower which will keep inflation in check. Do not confuse core inflation with commodity inflation, as wage inflation is the largest component of core inflation.

Fixed income markets will be a very interesting place this year as the markets are forecasting higher interest rates as a general point of view. However, we do not think the Fed will be so quick to raise interest rates which will temper negative total returns in this space. Higher rates will be good for high yield, but will hurt longer dated maturities that are currently locked in with low yields. The municipal bond market will have some trouble this year as the federal stimulus to the states has ended. There will be an increase in tax revenues but some states are in trouble and may not have access to the credit markets. The safest way to play the market is higher credit quality with shorter rather than longer dated paper.

Commercial & Residential Real Estate As we have previously mentioned, demographics suggest low housing demand for years to come (please refer to our 3rd qtr 2005 and following commentaries). There is an inventory overhang and higher rates will slow demand. Residential housing is in bad shape as there is an enormous amount of foreclosed homes that will eventually hit the market when the banks fix their administrative issues. Commercial retail space will also have a tougher time as the internet replaces bricks and mortar.

Absolute return hedge funds might slightly under-perform equities this year, but they will do so with one third of the volatility. We believe this space is an important alternative to fixed income markets and reduces volatility in overall portfolio allocation.

Commodities should have another positive year as slightly improving economies and demand will push prices higher. Gold will continue to be used as an alternative to currency and could move up another $300-$600. Weakness and or strength in the US dollar will also move these markets.

Here’s to a prosperous 2011!