2012 –A Contrast between Negative Thinking and Positive Returns
2012 was a year that brought some unusual sadness. We suffered from Hurricane Sandy, lost too many lives in the shootings in Aurora and Newtown, and here at Wagner Wealth Management we grieved over the early deaths of some precious clients. Despite our daily focus on the markets and politics, we take a moment to be grateful for all of our blessings and wish you many more in 2013.
In the markets, 2012 was a year of contrast between negative thinking and positive returns. The S&P 500 earned almost 16% with dividends, and the Aggregate Bond Index earned 4%. Our portfolios captured an acceptable percentage of stock market returns, while keeping volatility very low. Despite the positive outcome in 2012, the market news seemed to focus solely on the negative -- near defaults in Europe, a Presidential election that divided the country, and a “fiscal cliff” debate that was unnecessarily alarming just by virtue of its name. From the daily media coverage, you would have thought the markets were in chaos. The lesson learned is that the markets and the economy are sometimes more stable than the news.
In fact, the current state of the U.S. economy is relatively stable. The economy grew about 2% in 2012 and is projected to grow at slightly less than 2% for 2013 – not robust numbers but not a recession either. Current unemployment is 7.8%, still too high to support strong GDP growth, but going in the right direction. American consumers have lowered their debt, and have more free cash flow than 5 years ago. Housing prices increased in 2012, and housing inventories declined, requiring new houses to be built. Corporations enjoy earnings per share better than in 2007, and have high cash reserves, reflecting reasonable health. With historically high levels of government debt and no plan to reduce it, there is no reason to be overly optimistic, but we can all agree that the economy has improved in the last three years.
So what was the bottom line effect of the fiscal cliff resolution? Taxes on those with higher incomes will increase, although the calculation of the tax increase is complex. We will of course incorporate the tax changes into our financial planning as the details of the tax code become clear. Congress gave itself a two month extension regarding extensive automatic spending cuts. If there is a productive compromise from Congress, businesses may become more confident in taking risk, which can lead to improved unemployment and GDP growth. We wouldn’t bet the farm on that. The more likely outcome is continued last minute wrangling leading to increased market volatility.
In Europe, Greece received two more bailouts in 2012, and the European Central Bank provided some breathing room for Spain and Italy by refinancing bonds and committing to outright purchases of bonds. This stimulus reduces the risk of a near term break-up of the Euro. However, banks remain overleveraged and continue not to lend, leaving Europe with a slightly negative growth outlook. In China, the economy is expected to grow, but the quality of growth is questionable. Government investment in infrastructure has increased dramatically but private sector investment has declined. The transition from a government- led economy to a private investment and consumer driven economy has yet to occur, reducing optimism for investment in Chinese markets.
Many people ask us in January about potential returns for the year ahead. This is generally a fool’s errand as there are too many unforeseen events that will occur in a 12 month period. The better question is “How is my portfolio positioned for 2013?” We are cautious about increasing our allocation to stocks until we have constructive fiscal policy that reduces government debt and simplifies taxes. We continue to increase our allocation to investments that look for yield and can be market neutral. In 2012, we added high yield bonds, Master Limited Partnership (MLP) stocks, and utility company stocks to increase income. We continued to emphasize hedged investments that can capture returns in an up market and provide a buffer in a down market. In the 1st Quarter, we anticipate the addition of a new mutual fund that buys and sells option contracts on the S&P 500, designed to earn income in a positive or negative stock market. We believe our low volatility approach with a dose of creativity will continue to serve our clients well.
On behalf of everyone at Wagner Wealth Management, we wish you a very Happy New Year.
The Wagner Wealth Team
* Information provided should not be construed as investment advice and is not meant to be taken as a recommendation to buy or sell. The financial situation and investment objectives of each individual must be considered for suitability prior to any recommendations being made.