|
Last Quarter Round-Up
As I suggested last quarter, the markets held their ground in the fourth quarter with only a 1% decline in the S&P 500 index. More important, perhaps, is the fact that the stock market had an impressive gain for the year with the S&P 500 index up 13.4%...a welcome change from the 2011 market performance.
Global monetary policy continued to be in full-support mode in the fourth quarter. In fact, the U.S. took a further step in its open-ended quantitative easing in December by setting targets for both unemployment and inflation to trigger a reversal of their monetary easing. Strong talk from the new Japanese Prime Minister suggested similar action may be taken there. I believe this extensive monetary intervention will have consequences, but the exact nature and timing of such is unknowable. Investors must watch and manage carefully.
Finally, the end of the fourth quarter saw the culmination of the U.S. "fiscal cliff" drama. This self-imposed, January 2, 2013 deadline of tax increases and government spending cuts (a.k.a. Sequestration) was created in November 2011 when the so-called Congressional "Super Committee" failed to come to a budget agreement. Since then, an already divisive Congress doubled down on its fiscal rhetoric. A last ditch, 12th hour effort avoided the cliff. The scene played out much as I expected with no grand bargain. Instead, the lame-duck Congress passed a bare-bones agreement that addresses only the tax increases, and left the spending cuts to be dealt with by the new Congress in 2013.
Current Quarter Outlook
I must admit I am a bit concerned about Q1 2013. For starters, we should all expect fourth quarter 2012 gross domestic product (GDP) to be disappointing. I believe the GDP disappointment will have two causes, the first being hurricane Sandy and the second being evidence of renewed global economic slowing. The low GDP numbers will likely weigh on confidence and the markets. Of greater concern, is what I see as a very politically charged first quarter. The government spending cuts mentioned above have not been addressed, they were simply pushed out to March 1. Those spending cuts now become yet another, self-imposed Congressional deadline. Add to that the fact that the so-called "Debt Ceiling" (the statutory limit of how much outstanding debt the U.S. can carry) was reached on December 31 and must be addressed no later than March. I think this is a recipe for a very difficult series of political battles. These battles directly affect fiscal policy and how the U.S. is viewed by investors around the world. In other words, I expect significant volatility in global financial markets.
On a more positive note, the U.S. housing market continues to improve, employment is holding its own and personal balance sheets are much improved. And, to give Congress credit where due, the fiscal cliff agreement has provided clarity on individual taxes. All of these measures are supportive of continued economic improvement. Thus, my concerns are more short-term as opposed to the remainder of 2013. My equity strategy for the quarter is to reduce U.S. exposure and add to Europeanpositions. For fixed income, the strategy is to add to short duration and reduce hi-yield exposure. |
