Year End 2011 Economic and Market Review
While the last few years have been highlighted with record swings in market returns and widely oscillating economic data, we expect 2012 will be less about the fringes and more about the middle. Although volatility is likely to remain elevated, the market and its economic backdrop may begin to migrate from the extremes — oftentimes even polarized extremes — toward a more normalized period where investor sentiment, economic activity and the market's direction start to move increasingly in alignment.
While moving away from the drastic extremes will be a welcome environment for whipsawed investors, the center offers its own distinct challenges and opportunities. The key hurdle for the market in 2012 will be finding the right balance and recognizing the dislocations that always exist. Please see below a recap of 2011 and keep an eye out over the next couple of days for our 2012 Market outlook that will describe our thinking in greater detail.
Economic and Market Review as of December 31, 2011
Economic and political developments infused the global markets with high levels of volatility during 2011. Headlines, especially news out of Europe, caused returns to swing up and down based on news and outlooks that quickly vacillated between feast and famine scenarios for the world economy. And because the markets were more focused on the macro economy than on individual companies, active managers were challenged to find company-specific opportunities.
While global investing has provided a solid diversification benefit over the past five years, during 2011, US stock and bond markets outperformed global markets. US stocks (large cap in particular) were buffeted up and down, yet the S&P 500 Index registered neither a gain nor a loss for the year as a whole.[1] In contrast, the MSCI EAFE (Europe, Australasia, Far East) Index, measuring the performance of developed markets outside the US and Canada, dropped -11.73%. And emerging market equities as measured by the MSCI Emerging Markets Index were down even more sharply at -18.17%, even though long-term prospects for this asset class remain strong. On the other hand, the flight to quality strongly benefited US Treasuries in particular and the Barclays US Aggregate Bond Index delivered +7.84%. As a result, well diversified portfolios showed a tendency to lag more concentrated US large cap oriented benchmarks (such as the Dow Jones Industrial Average or S&P 500 Index).
The US Economy:
Politics, confidence and sentiment have dominated economic perspectives in the US. Consumer sentiment and business sentiment are both down, nevertheless consumers are spending and businesses are showing signs of growth, as strong earnings were generally reported in 2011. Lingering questions that will need to be answered in order for financial markets to reward those strong earnings include whether divided politics will continue to dominate and whether negative sentiment will help push the US back into recession.
The level of uncertainty is high. For example, the housing market is still trying to find a bottom, and slowing in Europe and Asia may negatively impact US corporate profits. In this context, the policies that could result are unpredictable, setting the stage for a wide range of potential paths.
The European Economy:
The ongoing Eurozone crisis is at least as much a banking crisis as a sovereign crisis because of the high percentage of bank assets and the degree of banking leverage in Europe. As we begin 2012, much instability remains in Europe, where political leaders in Germany and France have exhibited an anti-market bias. Europe will likely continue to experience a series of ongoing crises or flashpoints at a minimum. Specifically, serious slowdowns in Spain and Greece are expected. However, if the European Central Bank decides to pursue quantitative easing, that could brighten the outlook.
The Emerging Market Economies:
China stimulated very aggressively during the global financial crisis and then experienced some slowdown when the stimulus was removed. As inflationary pressures rose, policy tightening was undertaken and inflation is now dropping. If the developed world enters into a deep recession or experiences a credit crunch, the emerging markets will not escape. But countries like Brazil and China are already renewing stimulative policies to counter recessionary forces.
Productivity in the emerging markets is likely to continue growing at a faster rate than in the developed markets. However, there is still a material risk of a hard landing in China stemming from the real estate bubble there or if domestic consumer demand does not rise to a level sufficient to replace developed world demand.
2012 Perspectives:
Last year, headlines and temporary disconnects between US and global asset classes dominated the landscape. This hurt active managers and broadly globally diversified investment strategies. But the story in 2012 may be very different. In fact, a very wide range of plausible scenarios may play out in the New Year.
This makes our philosophy of diversifying across asset allocation approaches more important than ever. If governments begin to solve their debt crises, if housing finally bottoms and consumer confidence rises, a global recovery could favor strategies that take advantage of the tailwinds of bull markets. But if European contagion spreads globally, strategies that seek to minimize the impact of a reinvigorated bear market on client portfolios could be key. Or the outcome could be somewhere in between. Because there is no way to know in advance, it is important to diversify investments for a wide range of possibilities.
Best Always,
Bob
Robert O'Braitis
President
Chief Financial Strategist
703-724-9499
bob@lpwmgroup.com
www.lpwmgroup.com
44084 Riverside Parkway
Suite 120
Lansdowne, VA 20176
CA insurance License #: 0G99593
[1] The S&P 500 Index price return was 0% and the total return with dividends reinvested was 2.11% for 2011.
This information has been obtained from an outside source and is provided by Robert O'Braitis. Robert O'Braitis, AXA Advisors and AXA Network do not guarantee or accept liability for its accuracy. This information should not be construed as investment advice. It is not possible to invest directly in an index. All economic and performance data are historical and not indicative of future results. AGE-66866 (1/12)
CA Insurance License #: 0G99593
Robert O'Braitis is a registered representative and investment advisor representative who offers securities and investment advisory services through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA/SIPC, and is an agent who offers annuity and insurance products through AXA Network, LLC and/or its insurance agency subsidiaries. AXA Network, LLC does business in California as AXA Network Insurance Agency of California, LLC and, in Utah, as AXA Network Insurance Agency of Utah, LLC. AXA Advisors and AXA Network are affiliated companies and do not provide tax or legal advice. Representatives may transact business, which includes offering products and services and/or responding to inquiries, only in state(s) in which they are properly registered and/or licensed. Your receipt of this e-mail does not necessarily indicate that the sender is able to transact business in your state. is not a registered investment advisor and is not owned or operated by AXA Advisors or AXA Network. Retirement Planning Specialist title awarded by AXA Advisors, based upon receipt of a Certificate in Retirement Planning from the Wharton School of the University of Pennsylv
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