2012 Fourth Quarter Commentary: A Happy Year for Investors (Pundits, Not So Much)


Despite much anxiety at the start of last year over any number of matters – the fiscal cliff, a weak employment picture, and Europe’s continuing woes – AND the dire predictions of many market pundits at 2012’s outset, the year turned out to be a very strong one for equity investors across the globe, with almost every broad global stock index rising between 13% and 18% for the year. Many individual European markets, despite the EU-wide uncertainty, saw returns of between 30% and 40%, and Egypt’s market, in spite of its horrendous political situation, went up 55% (47% in US dollars). Bond yields, while stable, were still firmly moored in record-low territory at year’s end with the five year Treasury yield still below 1%, the 10-year yields below 2%, and even the long-bond 30-year yield just barely under 3%.

Many pundits were not so optimistic at the outset of the year, and some were downright gloomy with famed investor Jim Rogers (co-founder of the Quantum Fund with billionaire investor George Soros) on record as saying he wasn’t optimistic about stock markets and didn’t own many stocks around the world. Jim Cramer, of CNBC fame, recommended steering clear of bank stocks altogether. As it turned out, the financial sector was the best performing major sector of all, up 26% for the year, with the KBW Philadelphia Bank Index leading the way, itself up more than 30% for the year. John Paulson, who made billions betting on the subprime mortgage collapse, continued his string of very bad bets, predicting that Europe would collapse . . . and Morgan Stanley predicted a 7% decline in US stocks vs. the 13% gain we actually saw. Even vaunted Goldman Sach’s David Kostin predicted that the S&P 500 would drop 25% in the midst of a Euro collapse.

This is not to single out these particular pundits, as there were others who correctly called the strong year, but if I were to draw any conclusions from the above two anecdotes (and the larger problem they represent), it would be these:

  1. Don’t confuse entertainment with advice, and remember that pretty much anything you see on TV or listen to on the radio that is investment-oriented is just that – entertainment; and
  2. Even very sophisticated investors who are supposedly “in the know” don’t have very good crystal balls, and are not much more likely than 50% to be right in their predictions as the future has a way of confounding even the smartest among us. If such experts are guilty of anything, it’s not stupidity, but rather overconfidence. So, if we learn anything from years like 2012, it should be this: don’t place too much credence on anyone’s predictions (including our own).

The Fiscal Cliff

In addition to a strong showing from equity markets in 2012, the year ended with the hope of a partial resolution to the fiscal cliff issues, which was in fact realized on January 1st, just ahead of US markets opening for the year. This spurred the Dow Jones Industrial Average to a 309 point gain on the first day of this year. Although tax rates will rise for singles making more than $400,000 in taxable income (and $450,000 for marrieds filing joint), the lower current tax rates from the Bush era tax cuts – both regular income and capital gains rates – became permanent for the vast majority of Americans. Furthermore, Congress finally dealt with the ongoing uncertainty around estate tax issues with a new (and apparently permanent) estate tax exemption amount of $5,000,000 per individual, and also made permanent the spousal portability provision, allowing up to $10,000,000 per couple to be transferred to heirs estate tax free with proper planning.

The tax rate picture wasn’t all good news, though, as the payroll tax cut holiday will reduce paychecks by 2% for most workers making less than $114,000, and by twice that amount for self-employed taxpayers, who foot both the employer and employee portions of that tax.

The task of dealing with the automatic spending cuts that were scheduled to go into effect on January 1st, and which are an important part of the fiscal cliff negotiations, has been kicked down the road for another two months, but markets were clearly relieved by the removal of uncertainty around tax rates and probably by the fact that Congress was able to come to terms on the important tax rate issues.

Economic Growth

The current economic environment, I believe, can best be described as “slow growth, but continuing to improve” and most of the economic data from the year just past would seem to support this view:

  • The US GDP probably grew at around 2% for the year, although economic growth appeared to decelerate a bit in Q4;
  • Inflation continues to be quite restrained, probably finishing the year at under 2%, with the CRB Raw Industrial Index (a global indicator of inflation) rising only 2.6%;
  • The US unemployment rate gradually declined during 2012, finishing the year at 7.8%;
  • The European situation seems to have stabilized, largely due to the actions of the European Central Bank, but the EU’s problems are deep and structural and will take years to be fully resolved. However, looking at the strong performance of European stock markets over the last year, it would appear that investors are much more confident of an eventual solution than they were a year ago;
  • China and other Asian economies also appear to have stabilized after a bout of weakness earlier in the year.

So, the world economy continued to improve, albeit slowly, and markets in 2012 reflected that improvement. However, despite a strong year in stocks and a gradually improving economic picture, as is too often the case, individual investors as a group were on the wrong side of the trade as they were net sellers of stocks throughout 2012 . . . and this in a year where, in hindsight, they would have been clearly better to have bought or held stocks, not sold them.

Finally, as we look forward, it’s worth keeping in mind that the known information and economic data that we can all see is almost certainly reflected in today’s market prices and, as in much of life, it’s the unexpected events and the currently unforeseen factors that are likely to be the determinants of market performance. It’s also worth remembering that over the last 10 years, despite the events of 2007-2008, the MSCI All-World Stock Index is up 8.66% per year in US dollar terms, even if it was a rocky and volatile ride along the way.

I hope that 2013 is off to a good start and that the year ahead holds good news for you and your family. As always, please let me know if there is anything we can do for you.