Even in the face of persistent negative general sentiment, U.S. economic indicators continue to slowly improve. Although the unemployment rate stalled in the final quarter at 7.8%, the full year did show improvement. To potentially enhance this, from a monetary policy perspective, the Fed took the unprecedented step of indicating their intent to keep short-term interest rates near zero until the unemployment rate falls to 6.5%; as long as inflation remains subdued. Further, housing starts and existing sales are both at their highest levels in the last several years. Consumer spending also continues to slowly loosen while their balance sheets improve, enhancing prospects for continued expansion in GDP.
Such improvements seem unexpected given the past, and likely continuing, political deadlock seen in Washington. This reflects the resiliency and adaptability of the private U.S. economy. In spite of a lack of any coherent fiscal policy, the private sector adjusts and does the best it can to profitably move forward. Meanwhile, the executive and legislative branches of the federal government continue to entrench themselves in political positions which result in avoidance of the difficult fiscal decisions that need to be dealt with. The election results indicate that this operating mode should not be expected to change. Continued gridlock would portent fiscal decisions that are deferred, diluted and ineffectual. The impact will be to increase market volatility as well as disillusion with government, while the private economy will continue to shake its collective head and persevere.
U.S. elections and fiscal concerns at least gave some respite from worrying about Europe. There, the European Central Bank's commitment to save the Euro, including buying unlimited quantities of sovereign debt, seems to have calmed markets for the time being. Although the Euro Zone appears to have avoided falling off the abyss, recessionary problems persist. These countries have to varying degrees, very similar issues to that of the U.S. in terms of the economic growth versus austerity political divide. Nevertheless, the private sectors within a number of these countries have proven extremely resourceful and already show some improvement.
Elsewhere across the globe, even as China continues to experience more developed economy growing pains, their fourth quarter growth and export statistics continued to be strong. In Japan, the new prime minister is following the path of the U.S. and Europe by urging the Bank of Japan to break the nation's deflationary spiral by providing liquidity to Japanese banks. The Japanese stock market has thus far responded favorably to this policy.
In light of much economic uncertainty, investors have begun to direct funds back into equities. From January 2007 to August 2012, almost $200 billion was withdrawn from domestic stock and exchange traded funds. That's despite a bull market recovery since March 2009 that saw the S&P 500 Index soaring 108% through November 2012. Reuters has characterized that rally as "the most uncelebrated bull market in history."
The recovery of capital flows into equities may persist for some time even as markets reach peak levels. One reason for this may be that the previous peak levels for some markets were quite a few years ago. For example, even as we reach five year highs following the strong performance of the S&P 500 during 2012, the annualized return of this benchmark over the last 13 years is only 1.6%. Going back almost 90 years, this kind of event happens only about 16% of the time and over half of those occurrences were due to statistics attributable to the Great Depression. Thus, the longer your capital remains invested, the more the chance you'll actually receive the average results for any asset class and the average results of any asset class over time have been highest for stocks. In all, we think it's realistic to expect stocks to continue reverting to the mean in the years ahead and overcome the bottom-quartile returns of the last 13 years.
Further, with the current yield on the ten year Treasury bond being about 1.6%, investors also may seek higher potential returns through equity investments. At the current price-earnings ratio of the S&P 500 of 16.5 that equates to an earnings yield of over 6.0%. Right now, stocks are the only asset class offering investors an entry point that's cheaper than it's long-term average.
In spite of some reasons to be cautiously optimistic, our suggested investment policy continues to call for first insulating your portfolio with cash and fixed income positions representative of the anticipated withdrawal requirements from the portfolio over the next several years. Then, amounts identified as not necessary for this period of time can be directed toward more volatile equities. Such equity exposure should then be broadly and effectively diversified in terms of markets, companies and styles of management. This approach most effectively employs the two most fundamental determinants of portfolio risk management, which are time and diversification.
We will end this commentary with a recent quote from Warren Buffett that we thought was philosophically in line with our suggested investment policy: "Five years from now, 10 years from now, the world everywhere will be doing better....just because capitalism and market systems work. It's been working, you know, since 1776 here. And it wasn't because we have stimulus programs in 1794. Our system unleashes people's potential. And we've got 312 million people that want to do better tomorrow than today. Over time, that works. This country goes forward, and it'll continue to go forward. The luckiest person in history on a probability basis is the baby being born in the United States today."