2011 Review – 2012 Preview

This article is the last of a four part series that pertains to year-end financial planning.  The articles have appeared on consecutive Sundays during December in “The Record” and include, in order, “Year-End Tax Planning for Shareholders of Individual Stocks and Bonds” which appeared December 11^th, “Year-End Tax Planning for Shareholders of Mutual Funds” which appeared December 18^th, “Year End Tax Planning – Charitable Giving which appeared last Sunday, December 25^th and finally, this article entitled “2011 Review – 2012 Preview.”

Calendar year 2011 was one was one which stymied the vast majority of investors, both professional and individual alike, as both found themselves whipsawed by domestic as well as international political, corporate, and geopolitical events as well as what mother nature had to throw at us in the form of the Spring Tsunami in Japan and Hurricane Irene which ravaged the Eastern Seaboard of the United States.

Indeed the past year was much like a roller coaster that at times, churned your stomach and prompted you to grab for the Maalox.  However, like a roller coaster, the year ended where it started as going into the final day of trading this past Friday, the Standard & Poor’s 500, excluding dividends, was up a grand total of 0.43%.  All in all, we consider calendar year 2011 a success!

A success you might say?  To this we respond with a resounding “yes!”  Quite simply, in addition to the two events noted above, consider what investors went through on the “Comet” ride.  Consider the Arab uprising in the Spring which began in Egypt and then swept through Saudi Arabia, Libya, Syria, Tunisia, Yemen, Bahrain, Algeria, and then leapt overseas morphing into the nonviolent Occupy Movement here in the United States.  This was just the beginning.  Investors were on the edge of their trading seats as our elected officials in their infinite wisdom and knowledge passed deadline after deadline regarding the raising of the debt ceiling back in late July and early August prompting a first ever downgrade of the “triple A” credit rating of the United States by Standard & Poor’s.

While these events were taking place, the European debt crisis simmered on the back burner through much of the Spring and early Summer only to move to the front as rioting in Greece occurred when politicians began to discuss the implementation of budgetary austerity measures.  This discussion pushed the yields on Greek sovereign debt to nearly 60% which, like a contagion, spilled over into other European countries sitting on the Mediterranean Sea, notably Italy and Spain.  It was only through measures taken by global Central Bankers that at least temporarily stemmed this contagion by adding liquidity into the financial system.  Although this will buy Europe time, it does not solve the issue of solvency.  One reason why we consider this year from an investment perspective a success is because when you look around you, unchanged isn’t bad.  The French Stock Market fell approximately 17% last year while the German, British and Swiss bourses slipped approximately 15%, 8% and 6%, respectively.

There’s a country song by Rodney Atkins which states “if you’re going through hell, keep on going.  Don’t slow down.  If you’re scared don’t show it.”  That is exactly what the United States did during 2011 because although the housing and labor markets have remained in the doldrums since the recession began in 2008, we are exiting calendar year2011 in better shape than we entered it as housing inventories are being worked off and jobs have begun to be created.  All in all the economy has weathered many body blows, but remains on the upswing.  That is a plus.

For the reasons noted above, we are happy investment returns have been flat for 2011.  However, the real question is what will calendar year 2012 bring.  In a nutshell, we currently believe calendar year 2012 will bring more of the same as 2011 in terms of volatility and “Maalox Moments,” but with a bias to the upside.  Furthermore, we believe if we are wrong it will be because this outlook will have been too conservative.  There is a real potential for a recovery in the manufacturing sector as more companies are returning jobs to our shores, a recovery in the housing market for reasons noted above and an energy boom.  However, the wild card remains our elected officials.  Will they take the necessary steps to rein in spending on entitlement programs such as Medicare, Medicaid and Social Security without compromising this slow, but mounting recovery or will they continue to take the easy way out, passing the buck until after next year’s Presidential Election?  A balancing act between temporary stimulus and long-term spending discipline is paramount if we are to right the U.S. Economic Ship.  If this occurs, we believe the stock market is in for more than double digit gains in 2012.  That said, we put this likelihood at less than 50% resulting in our more cautious outlook outlined earlier in this paragraph.

Best wishes for a Happy, Healthy, and Prosperous New Year!

This entry was posted on Sunday, January 1st, 2012 at 8:55 am and is filed under Columns. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.