As Published in the Winter 2013 Edition of NJ Lifestyle

Stocks shrug off concerns and climb wall of worry in 2012 to double-digit gains

Europe —The year 2012 began much as the year 2011 ended, with much of the news revolving around the fiscal crisis in Europe. Would Greece default and leave the Eurozone? Would the Eurozone break up or kick some of the smaller financially weaker nations out? It seemed again that Europe might drag the rest of the developed world back into the recession it had just left several years before. That is, until the European Central Bank’s (ECB) President Mario Draghi announced in August that the ECB would use the roughly $500 billion Euros ($620 billion dollars) of the ECB’s lending capacity to purchase bonds of struggling countries in an attempt to keep yields from rising sharply on these cash strapped countries. It was a brilliant move for two reasons. First, the ECB did not have enough money to bail out all of the countries in need, but by preventing escalating borrowing costs for these countries, he bought them the much-needed time to get their fiscal houses in order. Secondly, it restored confidence in Europe, at least for the time being. In financial markets, as we saw in 2008, confidence, or lack of confidence, can mean life or death.
Obamacare Upheld by Supreme Court — In June, the Supreme Court of the U.S. voted 5-4 to uphold the constitutionality of the President’s Healthcare Plan. Although many of the provisions and costs of this legislation have yet to be felt, it is here to stay unless Congress repeals, which is extremely unlikely at present.
U.S. Fiscal Crisis, Deficit Debates and the Fiscal Cliff — In 2012, the United States finished its fourth consecutive year of more than $1 trillion dollars of budget deficit. Once again, Congress kicked the can down the road and did not address our budget deficits and, in the last hours of 2012, passed legislation to extend the Bush-era tax cuts for those families making less than $450,000 per year. The President and the Senate got their much sought after tax increase on the top 2%. Unfortunately, it still doesn’t scratch our deficits. We will see in the coming months if they actually can address the spending side of the budget equation.
Hurricane Sandy —The devastating superstorm that caused the deaths of more than 100 people, left tens of thousands of people homeless, and has a price tag of more than $70 billion in damage.
It is amazing that even with all of the negative headlines we experienced in 2012, that you had an above average year for investing. All major stock indices, including Developed and Emerging International Markets, finished with strong double-digit gains. Here in the U.S., the S&P 500 was up 13%.
Our markets didn’t ignore the bad news, rather they focused on some of the positive news that we saw in 2012:

  • The first real signs of a sustainable recovery in U.S. Housing Market.
  • China stabilizing their growth rate after a few years of decline in that growth.
  • Unemployment rate declined or remained steady in all but two months, moving from 8.5% at the beginning of the year to 7.8% by the end of the year.
  • Economy showed signs that we could get back to normal growth rate.The third quarter of 2012 saw the second best quarterly GDP growth (3.1%) since 2009.
  • Continued resurgence in U.S. manufacturing led by low cost of energy, particularly natural gas.

One of the lessons we believe investors should take away from 2012 is not to sit on the sidelines and avoid equities because of headline risk. All year long, bearish analysts were calling for a double-digit pullback due to all of the headline risks. That pullback never happened. Review your portfolio and be comfortable with the asset allocation and associated risk that you and your advisor have adopted for your portfolio and ignore the noise.