NEWS

2013-01-31 :: 4th Quarter Commentary 2012

2013-1-10::4th Quarter 2012 Commentary

Looking Back

The 4th quarter of 2012 was a mixed picture for equity markets.  Large Cap U.S. stocks were relatively flat with value putting in a slightly positive return and growth stocks putting in a slightly negative return.  The S&P 500 ended the quarter down 0.4%.  The big winners were non-US stocks with EAFE coming in up over 6% and Emerging Markets following close behind up over 5%.  In the U.S., mid-cap and small-cap did better than the large cap stocks with value also outperforming growth.  All in all 2012 was a very good year for equities with the worst performing sector (Small Growth) up 14.6%. 

Fixed income:  For the first time in year’s equities outperformed bonds.  Most fixed income instruments, especially longer dated paper, sold off a bit during the quarter as we started the quarter with the ten year treasury yielding 1.6% and ending the quarter at roughly 1.75%.

Absolute return hedge funds underperformed again this year as direction was difficult to find, however, most absolute return funds did put in a positive year albeit not as good as they should have done. 
Real Estate:  Housing showed signs of improvement but it was moderate at best and still has a long way to go.  

Commodities:  Gold, metals and energy started the quarter with a downdraft, but as the Fed started their announcements of money printing, these commodities starting moving back up a bit.
 

2012 YTD   (Total Return)
Russell 1000  16.42%                      Mid-cap 17.28%                     Russell 2000 16.35%

Russell 1000 Value 17.51%            Mid-cap Value 18.51%           Russell 2000 Value 18.05%

Russell 1000 Growth15.26%           Mid-cap Growth 15.81%        Russell 2000 Growth 14.59%

MSCI EAFE  13.55%                       MSCI Emerg Mkts15.15%     S&P 500   16.00%

 

Looking Forward

Equities: Our moderate long term view on the equity markets continues:  slow growth and moderate returns for the foreseeable future.  The administration did get a deal on the fiscal cliff; however, it was more of a band aid than helpful legislation.  Additionally, the US deficit, payroll tax and balanced budget negotiations were not addressed. 77% of all taxpayers will pay more taxes which does not promote growth.  The negative consequences will be on the GDP as spending comprises approx. 2/3rds of GDP. Our perspective; the markets are not historically expensive, but an economy with low GDP growth should be trading at a discount to historical valuations. We believe the markets short-term are fairly priced, but could rise 5-8% for 2013.  At some point, the overhang of US and European debt will come to haunt all of us. The Eurozone, while making some progress, will continue to be a long term problem. We have been preaching dividends, dividends, dividends for the last two years and will continue to do so until we see a real positive change in the direction of our economy. We still like Emerging Market equities due to the demographics and low debt ratios, but it will be very volatile with the highest opportunity to outperform.  Oil prices have come down a bit and that is helpful, but our dysfunctional government is becoming the biggest problem we have to growing our economy.

Fixed income markets:  We continue to see fixed income as a place for safety, however, the outsized returns over the last several years will not continue. Thanks to all the Fed buying, interest rates should still trade within a range, albeit a higher range than we have seen in the past.  The ten year treasury could work its way back to 2.5% and go as low as 1.6% but these ranges will continue to move higher for the foreseeable future.  This will end eventually -- it is just a matter of time. We feel it is prudent to keep bond portfolios with shorter durations to protect against the future upward movement in the bond yield. We believe treasuries and high yield are fairly valued. We favor investment grade corporates over sovereign and US debt, as corporations are in better shape than government paper. We also believe that bond investments need to be diversified with investment grade emerging market bonds, among other sectors, that would help balance out the risk.

Commercial & Residential Real Estate:  There continues to be no change to our forecast in real estate: housing has improved but there is still a long way to go.  Some of the improvement has been done by speculators and continued distressed sales.  We changed our opinion on housing December 31, 2008 from negative to neutral, but don’t see a significant housing price appreciation for several years.  Please refer to our commentaries from Q3 2005, Q4 2008 and 2009 commentaries. We think multiple unit rental properties and corporate properties are one of the few places to be in real estate with positive cash flow. As for “retail” real estate, we continue to be negative.

Absolute return hedge funds are boring, but lower portfolio volatility. They have not done well relative to equity and fixed income markets, but the tides will be changing as debt outperformance is over. 

Commodities:  The US dollar has begun to weaken again and that should help commodities.  Now that QE3 and QE4 are in full swing this should be good for most commodities. Certain metals that are more industrial and dependent on economic growth will probably not participate in the upside.  Gold should do very well here as developed countries continue to debase their currencies.