2011 Year in Review


2011 was nearly a re-run of the prior year, but without the 4th quarter happy ending that we got in 2010. As was the case in 2010, two of the big stories were the fear that the US might fall back into recession, which did not happen, and the possibility of a Eurozone meltdown due to the southern European debt crisis. As if that weren’t enough, there was also the US debt ceiling debate and the resulting S&P downgrade of the US’ AAA credit rating, and this just increased the sense of uncertainty in markets worldwide.

Despite these worries, US stocks finished up 2.11% for the year based on the S&P 500, and bonds had a surprisingly, and largely unexpectedly, strong year due to the flight to quality resulting from all of the worries mentioned above. International stocks did not fare as well, though, with the MSCI All-World (excluding US) Stock Index down nearly 14%. This significant portion of most client portfolios dragged returns into slightly negative territory for the year, with clients who held a 60% equity portfolio seeing returns typically between -2% and -5%, and clients with all-equity portfolios seeing returns in the -9% to -11% range. Although international holdings have underperformed US markets over the last two years, they have added significantly to most client returns over the last decade and I would not let the last year or two’s poor showing dissuade us from international exposure, especially given their relatively low valuations at the moment.

As I write this, January is off to a good start with global equity markets up 4%, erasing about one-third of last year’s losses, and stock market volatility significantly reduced relative to what we saw in the latter part of last year.

Rather than provide a long commentary, I thought I’d opt for a more graphical approach this quarter. Here is a link to several charts in Adobe Reader (PDF) format, some with a few short comments I have provided, that look at the state of the economy and the performance of various market indicators. All of the charts come from the JP Morgan “Littlebook”, which is published quarterly.

The one big question mark that, more than any other, held the markets back last year was the European debt situation, and that question has yet to be answered. However, I am both hopeful and optimistic that – if for no other reason than self-interest of the largest European economies – they will ultimately come to some sort of workable resolution, and if and when that happens, I would suspect that much of the downward pressure on global markets will be relieved, with positive market results. Hopefully, we’ll see material progress on that front this year.

As always, please let me know if you have any questions or if there is anything we can do for you.