Q4 2011 Newsletter

I was watching my daughter spin and toss a yo-yo — catching it on the way back up, and sometimes missing it.  But at the end of the day, the yo-yo finished right where it started — back in her hand.  That sums up 2011.  The S&P 500, after a yo-yo ride, finished the year slightly negative.  Looking back, we believed the U.S. was going to skirt a second recession while continuing to pick up steam as the year progressed.  However, by the end of the first half of the year, it was clear that expectations had been too high.  Yet despite an Arab uprising, a Japanese earthquake and tsunami, fears over Europe and the first ever downgrade of U.S. debt, the economy finished the year in better shape than it began with signs pointing to further improvements in 2012.

Even though it is a new year, some themes just don’t want to go away.  The concern over Europe will continue into 2012.  Last year Europe put band-aids on a condition that required a full commitment to help the Eurozone.  We believe the situation is becoming too far advanced for band-aid fixes in 2012.  Another theme that continues to play out is the “soft landing” in China.  China is not immune from the economic weaknesses found elsewhere in the world.  We remain optimistic for this region, however, we have reduced our international exposure in favor of better valuations and more stability back home.

Over the course of 2011, we saw the unemployment rate fall from a high of 9.1% to 8.5%.  With improving jobless claims and businesses showing an increased willingness to hire, we believe the news for the labor market should continue to improve into 2012.  Another phenomenon we began to see in 2011 was the “decoupling” of the U.S. equity markets from world markets in the fourth quarter.  Fear of a crisis in Europe pushed investors to “safety” which translates to large cap dividend paying companies with relatively stable revenue and earnings.  Many of these companies are at or near their 52-week highs.  As a side note, the U.S. has yet to deal with its debt burden which just recently passed 100% of GDP (gross domestic product).  Unfortunately, this issue will likely resurface in 2012 even though politics may make it impossible to resolve in an election year.

All in all, we start the year optimistically.  U.S. equity markets are at some of the cheapest levels in decades which creates long-term potential and opportunities.  While we expect volatility in equity markets to remain, we plan to continue to capitalize on this potential and protect portfolios from downside risk.  As always, if you would like to discuss areas in more detail please give us a call.  I look forward to 2012.

Best Regards,
Marc Henn CFP ®, President