If someone was looking at the annual return data for 2011 some 10 or 15 years from now, they could easily reach the conclusion that 2011 was a quiet year. The Dow Jones Industrial Average (DJIA) was up a modest 5.53%. The broader S&P 500 index ended just four-hundredths of a point lower than where it started, while the Russell 2000 gave back 5.45%. However, for those of us who experienced 2011 it was anything but quiet. The year will go down as one with periods of extreme volatility and where the terms "risk on" and "risk off" became part of our daily conversation. The US economy continued to struggle with minimal economic growth despite the Federal Reserve's ultra-low interest rate policy. High unemployment, a depression-like housing market, and the continual overhang of the European debt crisis all contributed to a volatile but lackluster year.
Gains within the US equity markets were found in several major economic sectors. The Utilities sector led all sectors with a gain of 14%. The Consumer Staples and Health sectors also exceeded the DJIA return for 2011. At the other end, Financials remained in last place losing over 14% for the year. Materials, Telecom, and Industrials round out the bottom four performing economic sectors losing between 11% and 4%.
International markets all had sizeable setbacks. The European debt crisis was the dominant economic story both here and abroad. The European-heavy MSCI EAFE index fell 14.82% and emerging markets did even worse. The four countries that make up the largest part of the emerging markets group, Brazil, Russia, India, and China were down 24%, 21%, 39%, and 20% respectively.
Commodities were mixed in 2011. Gold, even with its December pull back, posted a $147 per ounce gain (10.4%) for the year and WTI Oil added $7.61 per barrel (8.3%) while most other commodities were down. Natural gas was the biggest loser posting over a 50% drop followed by cocoa and most of the base metals (i.e. tin, copper, and nickel). The DJ UBS Commodity index, which measures the performance of a broad basket of currencies, was down 13.4% for the year.
Currencies made a lot of noise last year but there were no significant moves among the big three-US Dollar, Japanese Yen, and European Euro. The Yen was the strongest currency gaining about 5% while the Euro lost just over 3%. The Indian Rupee was one of the worst performing currencies losing about 24% for the year.
The strongest performing major asset category in 2011 was bonds. The sharp drop in US Treasury yields made long-term US Treasuries the best performing sector along with Treasury Inflation Protection Notes (TIPS). Most other bond sectors also performed well with gains between about 2% and 10%. Only the preferred sector posted a small loss among the bond sectors.
The first week of 2012 kicked off with another 2011-like choppy performance. The DJIA opened the week strong followed by somewhat indifferent trading. For the week, the DJIA posted a 1.2% gain. The S&P 500 added 1.6%, and the Russell 2000 gained 1.2%.
Sector performance saw the recent ranking of the major economic sectors more or less reverse. Materials, Financials, and Consumer Discretionary were the best performing sectors while Utilities, Telecom, and Consumer Staples were the worst.
The MSCI EAFE posted a 0.4% loss while the emerging market sector posted a nice 1.5% gain. As the European equity markets continued to weaken so did the Euro closing at $1.27 a 15-month low to the US Dollar.
Commodities were also up with the DJ UBS Commodities index gaining 1.3%. Gold saw a strong gain of $50 an ounce to close at $1616.80 (3.2%) and WTI Oil added $2.73 per barrel to close Friday at $101.56 (2.8%).
The Barclays Aggregate Bond index fell 0.15% with long-duration US Treasuries pulling back as interest rates edged upwards slightly. The 10-year US Treasury yield closed Friday at 1.957% up from the previous week's close of 1.871%. The best performing sectors within the bond category were Preferreds, High Yield, and TIPs while long-duration US Treasuries, International, and Emerging Market bonds were the weakest.
LOOKING TOWARDS 2012
I see three major themes that will challenge and influence investors for 2012:
1) The European debt crisis will remain front and center in the news and will exert enormous influence over the global economy. Europe is likely to move into a recession if it is not there already. 2) US political gridlock will confound investors as businesses and individuals try to determine which direction major economic policies will move. The specter of the presidential election in November will preoccupy Washington. Additionally, the growing US debt is becoming increasingly troublesome. 3) Geopolitical risks abound. The greatest threat emanates from Iran and the threat the pose to regional instability and oil supply interruption.
The impact of these challenges, in my opinion, will be to subdue economic growth. One of the smartest money managers, Bill Gross of PIMCO Funds, wrote this week that in 2012 "investors must lower their return expectations. 2-5% for stocks." In addition to a lower market return expectation, unemployment will continue to be abnormally high, households and countries will continue to deleverage, and interest rates will be historically low for the next few years.
So what is an investor to do? I will be emphasizing the following themes in my investment decision making:
1) Focus on companies and countries with strong balance sheets. This means that I am continuing to avoid most international investments for now. I do like global infrastructure investments and will certainly consider selective investments abroad. 2) Favor high yielding stocks and bonds. If the overall expected return of stock markets is going to be between 2% and 5% stocks with an equivalent dividend yields become more attractive. Selective municipal bonds appear attractive from a yield perspective. 3) Consider alternative investments. Please contact me if you have questions about what types of investments fall within this category. 4) Maintain flexibility. Buying and forgetting is not an investment strategy. There is too much risk for the markets to go off the rails or surge, so investors must stay focused on their portfolios.
A broad review of US markets today is that they are just slightly over-valued. While consumer sentiment may be improving, investor sentiment remains poor. This translates into volatile markets because investors lack the confidence to hold their investments on negative news. When trends begin they are quickly squashed by a new headline. Therefore, it is very difficult to pick winners or losers so I am suggesting a more balanced approach to "risk on" and "risk off" assets. While my relative strength analysis still favors mid-capitalization growth stocks, large cap stocks have shown the strongest near-term momentum. I believe that you should consider building a fairly broad allocation of US stocks within your targeted allocation for stocks.
I continue to suggest significantly underweighting international stocks for now. The Euro's weakness has created strong headwinds for commodities as the strength of the US dollar curbs international demand. I have favored commodities for most of 2011, however, I believe that commodity positions should be scrutinized and possibly trimmed moving into 2012.
Within the bond category I favor TIPS and international bonds. I also like exposure to high yield, floating rates, and quality corporates.
Again I want to wish all of you a very Happy and Prosperous New Year!
The NYCE US Dollar Index is a measure that calculates the value of the US dollar through a basket of six currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona, and the Swiss franc. The Euro is the predominant currency making up about 57% of the basket.
Currencies and futures generallyare volatile and are not suitable for all investors. Investment in foreign exchange related products is subject to many factors that contribute to or increase volatility, such as national debt levels and trade deficits, changes in domestic and foreign interest rates, and investors' expectations concerning interest rates, currency exchange rates and global or regional political, economic or fi nancial events and situations.
Corporate bonds contain elements of both interest rate risk and credit risk. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, offer a fixed rate of return and fixed principal value. U.S. Treasury bills do not eliminate market risk. The purchase of bonds is subject to availability and market conditions. There is an inverse relationship between the price of bonds and the yield: when price goes up, yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity. Some bonds have call features that may affect income.
Emerging market investments involve higher risks than investments from developed countries and also involve increased risks due to differences in accounting methods, foreign taxation, political instability, and currency fluctuation. The main risks of international investing are currency fluctuations, differences in accounting methods, foreign taxation, economic, political or financial instability, and lack of timely or reliable information or unfavorable political or legal developments.
The Dow Jones UBS Commodities Index is composed of futures contracts on physical commodities. This index aims to provide a broadly diversified representation of commodity markets as an asset class. The index represents 19 commodities which are weighted to account for economic significance and market liquidity. This index cannot be traded directly. The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Past performance is no guarantee of future results. These investments may not be suitable for all investors, and there is no guarantee that any investment will be able to sell for a profit in the future.
As always, if you have any specific questions on your portfolio or wish to talk to me, please do not hesitate to call.
P.S. If you think this type of analysis would be of benefit to anyone you know, please share this communication with them.
Past performance is not indicative of future results and there is no assurance that any forecasts mentioned in this report will be obtained. Technical analysis is just one form of analysis. You may also want to consider quantitative and fundamental analysis before making any investment decisions.
Information in this update has been obtained from and is based upon sources that NTrust Wealth Management (NTWM) believes to be reliable, however NTWM does not guarantee its accuracy. All opinions and estimates constitute NTWM's judgment as of the date the update was created and are subject to change without notice. This update is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities must take into account existing public information on such security or any registered prospectus.
The bullish percent indicator (BPI) is a market breath indicator. The indicator is calculated by taking the total number of issues in an index or industry that are generating point and figure buy signals and dividing it by the total number of stocks in that group. The basic rule for using the bullish percent index is that when the BPI is above 70%, the market is overbought, and conversely when the indicator is below 30%, the market is oversold. The most popular BPI is the NYSE Bullish Percent Index, which is the tool of choice for famed point and figure analyst, Thomas Dorsey.
All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poors, this is a market capitalization weighted index, meaning the largest companies in the S&P 500 have a greater weighting than smaller companies. The S&P 500 Equal Weighted Index is determined by giving each of the 500 stocks in the index the same weighting in the index. The Dow Jones Industrial Average is based on the average performance of 30 large U.S. companies monitored by Dow Jones & Company. The Dow Jones Corporate Bond Index is comprised of 96 investment grade issues that are divided into the industrial, financial, and utility/telecom sectors. They are further divided by maturity with each of the sectors represented by 2, 5, 10 and 30-year maturities. The Morgan Stanley Capital International (MSCI) Europe, Australia and Far East (EAFE) Index is a broad-based index composed of non U.S. stocks traded on the major exchanges around the globe. The Russell 2000 Index is comprised of the 2000 smallest companies within the Russell 3000 Index, which is made up of the 3000 biggest companies in the US.
Securities and Advisory Services offered through Commonwealth Financial Network(R), Member FINRA/SIPC, a Registered Investment Adviser.