DWM 4Q12 Market Commentary

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Happy New Year! After a relatively strong first three quarters for both the equity and fixed income markets, fourth quarter readings were pretty muted. Frankly, that’s pretty good considering all of the headwinds we faced going into this last quarter of 2012. Probably the biggest story of all was the so-called “fiscal cliff”. It reminded us of all of the Y2K scares of a decade or so ago. Legislation to forestall this “cliff” passed before trading could start in the new year, and the market reacted by sending up stocks nicely. Ironically, this cliff agreement offered little to address our significant long-term debt issues. The proverbial “can” in WashingtonD.C. was indeed kicked down the road again. 

 Let’s celebrate the honorable return achievements of 2012 before looking ahead to 2013. 

Stocks finished the year up about 16% in most areas (S&P500: 16.0%, S&P600 Small Cap: up 16.3%, S&P400 Mid Cap up 17.8%, and MSCI World Index (ex-US) up 16.4%), reflecting a nice, unusual level rise across almost all equity investment styles.

Bonds showed some fair returns for calendar year 2012: Long-term Treasuries up about 3.5%, the US Aggregate Bond Index up 4.2%, and Munis up a solid 6.8%.

Commodities (which DWM classifies as alternatives) did not produce much evidenced by the Dow Jones-UBS Commodities Index falling 1.1% on the year. Also in the alternative area, some illiquid investments like equipment leasing and private timberland REITs did not provide as much bang for the buck this year. DWM expects these investments to recover as the global economic recovery continues. On the other hand, there were niches in the alternative landscape that fared quite well like public REITs and some absolute return strategies. A few noteworthy liquid alternative funds to mention are Marketfield Long/Short (up 13%+), RiverNorth/Doubleline Strategic Income (up 12%+) and Pimco All-Authority (up 17%+). A portfolio of liquid alternative funds continued in 2012 to help investors’ overall portfolios with solid results and non-correlation benefits in respect to the rest of the portfolio holdings.

All in all, 2012 was a rewarding year for most investors that weren’t sitting in cash. 

Looking forward to 2013, headwinds include lack of household income growth, lackluster consumer confidence, and further Washington political theater.In fact, the latter is a major problem as Congress continues to kick the can down the road. The cliff agreement was no “grand bargain” or a deal looking at both tax revenue and spending cuts in a way that can get our Federal deficit under control any time remotely soon. Certainly, Moody’s didn’t like it, basically putting the US on notice that it will most likely cut its AAA rating if it can’t make something happen soon. And something will need to happen quickly as the federal borrowing limit (aka “debt ceiling”) will be reached around the end of February. Remember the ludicrousness that played out in 2011 the last time we came close to hitting the ceiling?!? Expect more of the same. Long story short, Washington policy stalemate will continue to be a major story.

There are some real positives domestically like the recovering housing market, expanding manufacturing activity, and improving trade balance. But things aren’t so rosy overseas where the Eurozone is still in recession and China’s financial sector looks dicey. For a world where we are becoming more and more connected, we should all hope for a successful global economy. 

In conclusion, 2012 results show that positive results can occur in what may seem like shaky times. DWM cherishes the opportunity of providing its clients with solid investment results and sound financial planning that can help people achieve their long-term goals. DWM wishes a prosperous and healthy 2013 for you and your family.    

Brett M. Detterbeck, CFA, CFP®

 

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