Market Comment Q4 2012
- David G Shink, CFP ®
- Jan 8, 2013
- 6 min read
Updated: Mar 26
Originally Posted on January 8, 2013
2012 Year End Perspective
2012 was a year filled with uncertainty. The final results are quite surprising considering all the sweat and hand wringing that filled the year. It is not surprising that the market does exactly what was not predicted.
The market indexes all finished higher:
DOW up 7.3%
S&P up 13.4%
Nasdaq up 15.9%
Nattering nabobs of negativism
"In the United States today, we have more than our share of. They have formed their own 4-H club -- the hopeless, hysterical hypochondriacs of history."
This famous quote uttered by Spiro Agnew on 9-11-1970 is cited as a historical marker in the distrust of “mainstream” media by American Conservative politicians. It does not seem to be much of a stretch to broaden the concept to investors.
Turning our cheek as we are lambasted with what to fear next is what investing is about. People who own quality assets must avoid the urge to make changes due to scary scenarios. The myriad of sources of information that flow at us are being multiplied by technology. Everywhere you go people are staring at screens, often the tiny cell phone screen.
It would seem plausible that most of this information is not helping the average bear to make smarter decisions. In fact, most of what you might witness these days is either someone looking at a picture on social media (Facebook) or taking a picture of something to present to others staring at phones, tablets, or actual computer screens.
Media outlets in this arena need to attract your attention. The spectacular accident is the best way to attract viewers. The US presidential election cycle was a great example of this. After all the bluster and toxic noise, the balance of power remained little changed. The Obama V. Romney election story was treated as one that was life changing. This was going to be a real cliffhanger. Or not. It was a bit of a NON-event. Thank goodness for a decisive outcome. There was a great fear that we could have been left counting ballots in Florida for weeks.
It is fun to revisit the notion that Herman Cain or Michelle Bachman could have been serious Presidential candidates. I am still waiting for more guidance from that oracle vision and knowledge, Donald Trump.
The Fiscal Cliff was the real drama of Q4 2102. This was kabuki theatre that infected media across that spectrum. It is truly amazing to see fiscal policy (tax and spending) become a mainstream media event. The cliff was so artificial that now that we have a 1-1-2013 agreement the talk is already onto the next negotiation even though nothing has really been solved.
The problem is not taxes or spending. It is Medicare and Military. Watch and see if the political discourse addresses these issues. Then you will know that we are actually facing the real problem. People have paid dramatically less into Medicare that they receive in benefits. This was pointed out by David Brooks in the NY Times on 1-1-13
Until we begin to see real, honest political discussion of this issue, the “spending” problem of the federal government will not be solved. To say that we need to raise taxes or cut spending is dishonest. We have a demographic problem. It is the retirement of the Baby Boom generation. The military spending problem is another bag of potatoes. No politician can say a word about it.
For many years, it was often thought that when the Baby Boomers retired, there was going to be a challenge to the US economy and markets. This challenge is so big and politically toxic that no one is really even talking about it. All of the discussion is centered around tax rates and “spending”. This is not encouraging for those of us seeking truth and mathematically plausible policy.
As investors, the trends seem unchanged. The printing of dollars, formally known as QE3 is creating $85B per month. This important economic dynamic is driving assets out of cash and into bonds and equities. It is hard to see the attraction of bonds in this environment, but interest rates continue to go down as more dollars are created.
Predicting 2013 and beyond
You will not be hearing any predictions from my crystal ball. Just watch for those from the recent past who got it right (one time luck?) and see how well they do. The Saga of John Paulson is an incredible lesson of the humiliation of genius.
John Paulson, is a hedge fund manager who made a fortune ($3b approx) in the financial crisis of 2007-09. Paulson was the subject of a very worthwhile book, The Greatest Trade Ever. http://www.amazon.com/Greatest-Trade-Ever-Behind---Scenes/dp/0385529945/ref=sr_1_1?s=books&ie=UTF8&qid=1357155011&sr=1-1&keywords=gregory+zuckerman
Paulson made a great prediction leading up to the housing and financial crisis that began in 2007. He is now trying to predict the future again. It is not going well http://www.cnbc.com/id/100271335/OneTime_Hedge_Fund_Wiz_Faces_Second_Abysmal_Year
It should be noted that Paulson have never been distinguished as a visionary before his great trades were made. It is now likely that he will revert to the average hedge fund manager that he always was. Maybe he will turn out to be right (again). It is near certain that the future continues to be unknowable. The only thing that we can truly rely on as investors is the past. The past says that diversified portfolios of dividend paying stocks held over long periods have been one of the best ways to build wealth.
This has been true during the difficult challenges that investors have faced in the past. The problems that we face today are fierce. The Nattering Nabobs will have you believe the world may be ending. Remember that the world was supposed to end in 2012, they even made a movie about it http://www.sonypictures.com/movies/2012/. I wonder who would want to see such a movie when there are so many real scary things to worry about.
Cliffs of Worry
There is a famous wall street saying that the market climbs a “wall of worry”. I have taken this to mean that for all the trouble that we have to consider, the world will grind forward. It will never be easy or obvious, but challenges will be faced, solved or they simply pass.
This is a foundation theme for successful investing. When markets go down, it seems difficult to see that better trends will often follow. The crisis that began in 2007 ( and may not be over yet) caused a real fear of systemic collapse. It is likely that the historical analysis of this time may be that the complex market system actually performed quite well.
I wonder often these days about the call from people that wanted to sell out of the market in 2008 and 2009. The conversations that I had with people during that time all boiled down to the same emotional issue: I do not want to lose. I just want to know what I have, even if I do not earn anything, at least I won’t lose.
It now seems obvious that holding on was the correct choice. It was far from obvious then. For those that did sell, what did they do then? As the market has recovered from the lows of March 2009, the cost of not being invested has been substantial. That is what investors always need to think about. The next decision becomes even more difficult when we begin to react to the market.
Investing is a chess match against the whole world. It is never a onetime decision. That is the power of owning a diversified portfolio. You can avoid ongoing decision making. The data on the average holding period of mutual funds is incredibly short. People are always looking for the next exciting idea; the next “safe” way to wealth. There is an ocean of seekers for the new and improved strategy for consistent results. And they jump to that. They never look back to check and see if the decision was the right one.
As long term investors, we do not have to worry about that. History shows that patient, disciplined portfolios are a rewarding path to follow. We will not fall into that the trap of chasing the new gimmicks or fads that are presented. We will not allow fear to drive us out of good investments. And we will try to ignore the next prediction of the end of the world.
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