AND THE WINNER IS….TREASURIES?
By Gus Krafve
January 25th, 2012
An extremely volatile year has passed and the U.S. stock market, as measured by the S&P 500, was a picture of relative strength. The S&P 500 eked out a small gain for 2011 outperforming every major developed and nearly every developing market. While the showing by the S&P 500 was not as strong on an absolute basis as hoped, its performance was impressive in the face of double-digit percentage declines for most other major markets.
The beginning of 2011 certainly started on an optimistic note. The S&P 500 jumped 2.3% in January and was up 8.4% by the end of April. However, by early August, the S&P 500 was down 11.0% for the year. Investor optimism waned due to a string of caustic events that included a spike in energy costs, the after effects of the tsunami that hit Japan, the Eurozone’s sovereign debt crisis and the debilitating debt ceiling negotiations that led Standard & Poor’s to downgrade U.S. debt from AAA to AA+.
Despite all of the negative headlines, most major market US indices posted gains for the year. Safe-haven US treasuries were the clear winner and municipal bonds posted double digit gains. The performance numbers for 2011 are:
Despite the anticipated weakness in Europe, the U.S. economy is expected to grow at around 2% over the next several quarters. Unfortunately, this outlook is not likely to lead to a big improvement in the employment picture. The S&P 500 is trading at 12 times forward earnings, which is historically inexpensive. At the end of 2010, it stood at 14 times. Additionally, U.S. corporate balance sheets are strong holding record levels of cash. While these factors argue for an investment in equities, the attractive valuations are a reflection of the increased risk premiums being demanded in the face of so much uncertainty.
While the European situation is the biggest potential risk for 2012, it is a known variable the market has been dealing with for quite some time now. Other variables that are likely to play a part in market valuations and volatility include the trajectory of China’s economy, the 2012 U.S. presidential election, and geopolitical issues surrounding North Korea and Iran.
