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A Look Back on 2012

Posted on: January 10, 2013 |

Quarterly Report and Commentary

January 2013

The Apocalypse That Didn’t Happen!

2012 opened with lingering concern about the weak US recovery, the debt crisis in Europe, political uncertainty around the world, and even the Mayan “end of the world” calendar. Many financial pundits had predicted another lackluster year for stocks and more market volatility. Some predicted a euro zone breakup triggered by expected debt defaults in Greece and Portugal. The global economy was showing early signs of a slowdown, and late in the year many folks were watching television news programs showing a count-down clock to the “fiscal cliff”.

Despite a steady diet of bad news. most markets around the world climbed the proverbial “wall of worry” to log positive returns. Major market indices around the glove gained and, as a group, the non-US developed and emerging markets outperformed the US equity market. So much for the apocalypse!

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The above graph highlights some of the year’s prominent headlines in context of broad US market performance, as measure by the Russell 3000 Index. These headlines, I thought, got gloomier and doomier as the year progressed, We, as investors, had to maintain our long-term perspectives against the media’s minute to minute scare headline reporting.

During 2012 we had weekly jam sessions at the office to assess and re-assess the unfolding economic, political, and global stock market conditions. For example. we considered Greece’s impact on world events, should it have defaulted on its debt. Our conclusion for Greece and the majority of the impending 2012 crises was that they were minor blips blown out of all relative importance by the media. We all know that bad news sells!

Patience of Job was rewarded in 2012 with positive portfolio returns. I must have said the Serenity Prayer umpteen times last year. It was the part about “the wisdom to know the difference” that had me hooked. We sought the wisdom of experience to sift through the chaff of hype and reality. Reality, fortunately , won.

The World Stock Market Performance chart below offers a snapshot of global stock market performance, as measure by the MSCI All Country World Index. The global headlines show that despite an abundance of negative news during the year, global stock had an exceptional year.

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Economic Backdrop

Sluggish US Recovery

The current expansion, which started in mid-2009, has been deemed the weakest in postwar history. In past cycles, strong recessions were followed by strong recoveries. However, the current rebound has produced economic growth of just 2.4%, compared with a 3.4% postwar average, In 2012, we watched eagerly for signs that the US recovery was gaining, and that job growth and consumer confidence was improving.

Positive news did surface throughout the year, including healthy corporate earnings and strong balance sheets, continued low inflation, falling oil prices, historically low mortgage rates, a strengthening housing market, and upticks in auto sales, and manufacturing activity late in the year.

Continued European Debt Troubles

The euro zone continued its struggle to contain the sovereign debt problems of several member nations, including Spain, Italy, and Greece. The inability of these governments to pay interest on their debt has impacted the banks in stronger European countries, notably France and Germany, which have large exposure to the sovereign bonds, The European recession prompted banks that were holding troubled assets to reduce lending activity.

During 2012, the euro finance ministers agreed on a second bailout package for Greece, which included a 53% write-down for investors in Greek bonds, In May, concern grew over Spain’s fiscal health when a major bank requested a massive bailout and disclosed troubled assets. Following the Greek election in June, the European central bank pledged to provide monetary support to protect the euro, triggering a rally in stocks and bonds.

Rising Global Economic Worries

According to International Monetary Fund estimates, the global economy grew 3.3% in 2012–down from .8% in 2011 and 5.1% in 2010. There was concern that the worsening euro debt crisis would spread to other economies and markets. Europe accounts for a large portion of global demand, especially for export-dependent China. Germany’s economy is the fourth largest in the world, followed closely by France. Together, the combined economies of all 17 euro-area countries are nearly equal to that of the US, in GDP terms.

During the first half of 2012, China’s economy showed signs of weakening, with growth expected to fall to around 8%–a significant drop from it’s historical growth rate. China exports heavily to the euro zone. The crisis also threatened to reduce China’s exports to poorer emerging economies in Africa and Latin America,where nations rely heavily on European banks for trade financing, In the latter part of 2012 concerns over slowing growth in emerging markets had begun to ease as economies appeared to bottom out.

Stabilizing Actions by Central Banks

Many investors did not appear to anticipate the degree to which markets would positively respond to central bank actions. Many analysts credit the US and European central banks with boosting investor confidence in both markets and, in the case of the European Union, helping avert a euro breakup.The injection of liquidity into the respective economies also helped mute volatility between currencies. In September and October, the Bank of Japan announced measures to provide monetary stimulus through 2013 in response to slowing economic activity.

A Search for Higher Yield

Interest rates dropped slightly to near-record lows during the year. However, with the Fed and other central banks committing to keeping the financial markets liquid for an indefinite period, some investors found appeal in riskier fixed income securities such as junk bonds, emerging market debt, and collateralized loan obligations that offer higher yields.

Wall Street responded to rising demand with new offerings. Junk bond issuance hit a record $350 billion in 2012. We believe that the combination of unchecked risk appetites, low interest rates, and high bond prices may present danger for investors who are pursuing yields in markets that do not understand.

In September, the Fed announced it’s third round of quantitative easing to push long-term interest rates lower and encourage more borrowing and investment. All told, we expect these low interest rates (the 10 year Treasury is yielding about 1.7%) to remain around for some period of time. That may be anywhere from 3-24 months. It is just too uncertain to forecast future rate trends, but we expect rate changes to occur within the next two years.

2013

We remain optimistic about the outlook for security investments. As you know, we don’t attempt to forecast stock market performance or engage in market timing. We believe that asset allocation, base on your specific personal goals, is the approach that will provide the long-term returns for you needs.

John, who has been around the stock markets for nearly fifty years, says he’s as optimistic about the world of investment returns for the next five years as he has ever been He’s always an optimist, however, and we’ll have to see whether we give him a pat on the back or a kick in the pants in 2018.

John, Derek, Dawn, and Sue

 

 

Year-end Reporting

 

Annual Statements

You may have received your year-end report from Fidelity, or you will be receiving it shortly. The Fidelity statement contains your gain and loss report for the year along with an income and expense breakdown. Fidelity reports these to the IRS. If you have any questions on our report or your Fidelity statement, or find an discrepancies, please give us a call.

Often times we find that the year-end distributions that mutual funds reports to Fidelity are revised, usually by the end of January or early February. Therefore, we suggest that you do not prep rare or send your tax data to your accountant until at least mid-February.

Annual Disclosures

We are required to offer you a copy of our ADV II. It is a disclosure document we file with the SEC gby March 31. If you would like a copy, let us know and we’ll be pleased to send you one. ON an imprtant note, we have had no known consumer complaints, fraud charges, theft, money laundering, false or fabricated reports or other issues of transgression during 2012. Actually, none for all the years we’bve been in business.

Privacy Statement

We are required by federal law to provide you annually with a copy of our Privacy Statement. Protecting your privacy is of utmost importance to us. This notice defines our business practices to protect your privacy; how we collect and share personal information about you. You have provided us with your personal financial information and we follow our long-standing commitment to safeguard this information.

 

Annual Privacy Statement

Ferguson Asset Management collects personal information form our clients and prospective clients.

we do not sell or in any way share this information with any party other than what is required by Fidelity Investments to open accounts. This is limited to driver’s license number, social security number, age date of birth, bank information ,=] address , beneficiaries, employment status, and objectives. No other personal information is disclosed to them.

We believe all electronic communications are secure and retain a consultant to maintain the integrity of our systems.All personal or financial date that is destroyed by us is done so either by burning or shredding.

We do not market to your relatives, associate, or professional contacts unless asked to do so by you.

We will respond to subpoenas, court orders, or legal process,

If you have any questions or comments regarding our privacy policy please contact John Ferguson at 301-284-8786.

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