Winter Investment Letter {Part I}

Below is part I of our winter investment letter sent to clients last week.

“Things That Go Bump In The Night.”

"From ghoulies and ghosties
And long-leggedy beasties 
And things that go bump in the night
Good Lord, deliver us"  An old Scottish prayer.

Caution was the watchword among investment pundits and prognosticators at the beginning of 2012. A few brave souls saw the S&P 500 trading in the mid-1400s but the consensus stood with low single digit returns and an S&P final print around 1,338 1. Wall Street worried about many of the same issues that had dogged stocks for most of the past two years.   Here are a few of the things that made the worry list: global unemployment and a pinched consumer, anemic worldwide growth, a slowdown in China, whether the European Union could withstand its debt crisis, whether countries such as Greece, Italy and Spain would even be able to stay in the EU, ballooning US government debt, decelerating corporate earnings growth in the US and fiscal deadlock in Washington. Finally markets had to contend with our presidential elections, which always brings additional uncertainty.

We had a variant view.  In our letter to you this time last year we asked a rhetorical question. “What if things are getting better?”  We felt that stocks were cheap and that investors were ignoring the possibility of better than expected economic results.  We specifically looked at three areas: Our economy where we saw positive developments in improved housing data, improved unemployment claims and strong auto sales; Europe where we felt things were improving and China where we believed that a soft economic landing would be engineered; and most importantly an accommodative Federal Reserve.   In regards to the Federal Reserve, we felt that the nearly two trillion dollars sitting in money market accounts might finally be persuaded to start looking for higher returning risk assets if rates were to stay low for a longer period of time.  Our end of the year target for the S&P 500 back then was a range between 1,442-1,648.2.  We later revised that target range to between 1,450-1,550 with a 1,475 mid-range target for 2012.3.

What ultimately occurred is that stocks roared back from a disappointing 2011.  Globally, stock markets experienced double-digit growth last year.  The S&P 500 rose slightly over 13% before dividends.  The average stock gained 12.35%. The S&P 500 reached its high back in September when it traded just north of 1,475 before pulling back.  The S&P 500 closed 2012 at 1,426.  All those folks who came on TV or wrote in the press that last year was finally the start of something sinister for the financial world were wrong, just as they have been wrong since March of 2009.  Equity markets are up over 100% since then because in the end despite all of the problems that exist in the world, in spite of periods of gut wrenching volatility, in spite of politicians ready to tear each other limb from limb, despite the bad news out of Europe, earthquakes in Japan etc. things have been getting better. 

*Long ETFs related to the S&P 500 in client and personal accounts.