Fourth Quarter, 2011 Economic and Market Commentary

Calendar year 2011 was characterized by global debt concerns and uprisings from the Middle East to Wall Street.  From Tahrir Square in Egypt to the “Occupy” movement back home, from the Euro crisis to political gridlock in the U.S., and a natural disaster and resulting nuclear emergency in Japan thrown in for good measure, it is no surprise that it was a volatile and unsettling year in the equity markets. 

As we look ahead to 2012, several questions remain which may indicate continued levels of above average volatility.  These questions below do not necessarily imply down markets but they do show the breadth and scope of the range of uncertainty.  For example,  

  1. How aggressive will Europe be in addressing its sovereign debt issues?  Stronger Euro Zone countries, notably Germany, were at first reluctant to help out their economically weaker members such as Greece, Portugal, Italy and Spain.  That seems to be changing as it has become clearer that these debt issues are unlikely to be contained to just these countries and the risk of contagion to other European countries and banks could exasperate the recessions beginning in most European countries.    

  2. Will the U.S. start addressing its budget issues in a meaningful way or continue to kick the can down the road?  As 2012 is an election year, it is likely that Congress will continue to operate on a month-to-month basis and no longer term measures will be put in place until after the election. 

  3. Will the employment situation in the U.S. continue to improve?  The jobless rate ended the year at 8.5%, down from over 10% at the peak of the recession.  Nevertheless, this recession proved to be the most severe we have seen since the Great Depression and the pace of post-recession job growth has lagged that of past recessions.  The historical jobless rate is 6% so there is still a long way to go before we return to a healthy employment level.  Things are trending the right direction, but it remains to be seen if the pace of job creation can continue in 2012.

  4. Has the housing market bottomed out?  On the surface, it would appear that we are close.  Prices have begun to level out, affordability on both an absolute (combination of price reductions and low mortgage rates) and relative (vis-à-vis renting) basis are extremely attractive, and inventories continue to be slowly worked off the market. However, there are potential headwinds that could hold back any sustainable recovery such as wary buyers, tight lending standards and unseen property inventories of foreclosed properties.       

  5. Will consumer spending and corporate profits remain strong?  As we have discussed in previous reports, despite all the economic malaise and fiscal concerns, consumer spending has been relatively steady and corporate profits robust.  With consumers facing the threat of higher tax rates and inflation on the horizon, it is likely that wage growth will be needed to keep the consumer spending at current levels. 

  6. How would a slowdown to the Chinese economy affect the rest of the world?  Most economists agree that China will be hard-pressed to indefinitely maintain its robust economic growth rate.  As the most populous country in the word, how China manages this slowing growth will be important to preventing a rippling effect through the rest of the world.

While many of these issues may seem daunting, we remain cautiously optimistic that things will continue to trend in the right direction and global economies will manage to continue to slowly grow.  There will, of course, be periods of stagnation; however, equity markets also seem to reflect this tempered level of expansion.  Equity market movements seem to be still mostly influenced by investor’s sentiment and confidence rather than actual economic and corporate data.  While investor sentiment, even when deemed unjustified, can drive equity prices in the short term, we remain confident and positive in the longer-term prospects for the economy and corporate earnings, and thus, equity pricing.  For these reasons, we suggest continued adherence to an investment policy that allows for allocations toward growth with funds deemed not necessary in the short to intermediate term. 

The following table represents the index (i.e. passive) returns for each asset class used in our model growth component for the three and twelve month periods ending December 31, 2011: 

Benchmark Sector


3 Month Return

12 Month Return

Large-capitalization Domestic

S&P 500



Mid-capitalization Domestic

S&P 400



Small-capitalization Domestic

Russell 2000



Micro-capitalization Domestic

MSC US Microcap



Developed International Markets




Emerging International Markets




Real Estate Investment Trust




Global Real Estate Investment Trust




Equity returns were strong across the board in the last quarter of 2011 with domestic small cap and REIT stocks leading the way in what was a continued trend throughout the year of domestic equities outpacing foreign market returns.  For the year, the S&P 500 managed to eke out a small gain, but most asset class returns were in the red, with emerging markets, developed international and international REIT returns reflecting most of the declines.  The most fundamental impact to the weak international returns was Europe, particularly as seen within the financial sector.  Further, a strong U.S. dollar was an additional drag on international equity returns for both the three and twelve month periods.  Interestingly, domestic REITs were the strongest performing asset class for the second consecutive year.