January 2012
The U.S. economy began to pick up momentum during the past year and is positioned for modest growth in the coming year. The current recovery is starting its eleventh quarter of expansion, albeit at a weak pace, driven by an improving labor market, rising personal consumption, and growing capital expenditures. This momentum, along with continued growth in emerging markets, will be crucial as the global economy deals with the fallout of the European debt debacle. As some members of the world’s largest economic bloc adopt austerity programs to improve their fiscal positions, growth in Europe will likely be flat at best. This will impose a significant headwind to global growth.
The stock market took investors on a volatile ride for the year, but managed to end the year almost exactly where it started. In response to the volatility and the desire for yield, defensive sectors like utilities, consumer staples and healthcare posted double digit returns while financials and material stocks moved sharply in the other direction. In essence, shareholders spent the entire year collecting dividends. The good news for investors going forward is that earnings continued to grow during the year keeping the S&P 500 historically inexpensive. It is now trading at just 12-times its forward operating earnings.
As uncertainty over the European debt crisis held back equity markets, it provided fuel to the bond markets, in particular to US Treasuries. Governments, institutional investors, and financial institutions sought the relative safety of Treasuries as a means to reduce their exposure to European banks and sovereign debt. Investor returns were largely correlated to the length of their maturities. Longer dated Treasuries returned over 30% for the year, while the two year Treasury returned just under 2%. A similar, although less pronounced, pattern of returns also occurred in the corporate and municipal debt markets. Looking ahead, it may prove quite difficult for fixed income markets to stage anything close to a repeat performance, but history shows that it cannot be ruled out.
The main event facing the global economy in the coming year will be Europe’s ability or inability to resolve their fiscal issues while trying to maintain some semblance of their currency union. In addition, several major elections will be occurring in economically significant countries, most importantly the US. The chance of unforeseen political influences on the markets will be elevated. Add to this the possibility of unexpected military engagements and weather catastrophes and this coming year could be quite eventful.
Florida Investment Advisors has recently completed our annual filing with the Securities and Exchange Commission. In keeping with our goal of providing complete disclosure to our clients, our annual filing can be reviewed during business hours at our office at 601 Bayshore Blvd., Suite 960, Tampa, FL, 33606, or a copy can be mailed to you at your request.
