We ended 2012 and brought in 2013 as a cliffhanger. During the 4th quarter of 2012 markets around the world were obsessed with the question of whether the various parts of the US Government would agree to an alternative to the so-called “Fiscal Cliff. That drama ended with the can being kicked down the road again.
Washington and Main Street both had their problems. Individual investors often live in a state of denial. In the good times, we’ve seen investors reject the notion that the party will ever end. In the bad times, we’ve seen investors cling to the belief that things will never get better. The U.S. stock market has been on a bull run since early 2009. At the same time, individual investors have been pulling billions of dollars out of stocks each year.
As the S&P 500 rallied about 13% during the first eleven months of 2012, individual investors yanked about $152 billion from the U.S. stock market. That marks the third year in a row that investors have withdrawn more than $150 billion from U.S. stock mutual funds and ETFs. While individual investors have been shunning the market, institutional investors, such as hedge funds and pension funds, have been significantly adding to their stock positions adding more than $80 billion into stocks in 2012.
Investing is a forward-looking exercise and despite some serious issues facing this country the economy continues to improve, although at disappointingly slow rates.
What do we look to is we begin a new year? While we avoided the worst of the fiscal cliff on New Year’s Day, what we have now is a short-term compromise and not a grand bargain. To really bring the country’s fiscal house in order we have to address the tax code, “entitlement spending” and regulatory issues. The looming sequestration and the debate over the debt ceiling extend policy uncertainty and, at least for the early part of 2013, are likely to keep business leaders reluctant to deploy capital in a meaningful way. Despite considerable progress, the drag from household deleveraging still has months and billions to go.
The one bright spot of a geopolitical nature is that new technology, “fracking,” appears to be on the way of making the US truly energy independent for the first time in my lifetime; which could not come at a better time given the deteriorating situation in the Middle East.
While the governments in Washington and in many state houses leave fiscal and economic issues unaddressed in a meaningful way, we remain, as we have for some time, cautiously optimistic. That attitude is reflected in our portfolios which remain focused on generating a fair rate of return while keeping capital preservation always in mind.