The Short End of the Long View


A year to remember (or to forget)

To say that this year was a difficult one for world investors would be an understatement.  It started out with Egypt’s uprisings and the “Arab Spring”, follow by civil war in Libya and then by Japan’s devastating earthquake and tsunami in March. In the meantime, Greece nearly defaulted, and most of Europe teetered on the edge as country after country and bank after bank encountered liquidity concerns.  More global unrest occurred toward the end of the year with turmoil in Russia and the death of Kim Jong Il potentially leading to further instability in North Korea.

In short, investors have been forced to abandon traditional rules for evaluating companies and instead must attempt to understand global macro events and their impacts on stocks and bonds. It has not been an easy time for investors. Only cash, bonds (US Treasuries) and gold have had positive returns as of this writing. I read a recent statistic that something like 40% of actively managed funds have underperformed their respective benchmarks by 200 bps. This is the worst performance since 1998. Even typically stellar long-term investors like Bill Gross have had horrendous years.

However, there have been some pleasant surprises mixed in.  According to many gloom and doom analysts, municipal bonds were supposed to experience Armageddon. Nothing bad really happened, as states and municipalities muddled along and muni bonds turned in excellent positive returns in 2011. Gold, despite its ups and downs, did pretty well. US Treasuries were again, a hands-down winner.

2012 and beyond…I have never been really good at predictions. So I am not going to start now. Nevertheless, a few thoughts on the landscape for 2012 may be in order. Next year is an election year and crazy things can happen to markets in election years. The preliminary data from the U.S. has not been all that bad. Housing data seems to be flattening a bit and the jobs situation does seem to be bottoming a bit as well. Overall it feels like domestic stocks (especially large cap, unlevered dividend-paying companies) could fare reasonably well. Instability in Europe and elsewhere has still made the US a good safe haven, and the dollar could still benefit from that trend in 2012.

Europe is another matter. Things seem to be slowing there and policies there have been more restrictive and less encouraging.  There is no reason at present to see that the problems are over. The ratings agencies still have a large stick and they appear fearless in wielding it so far. China bears close watching. There could be another big shoe to drop there. (More on that subject in 2012).

The good news is that each year brings new hopes and aspirations.

Merry Christmas, Happy New Year and best hopes for prosperous investing in 2012 !

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