Weekly Markets Commentary - January 9, 2013
David Joy — Chief Market Strategist, Ameriprise Financial
Reflections on 2012, and prospects for the year ahead
Despite a year characterized by policy uncertainty, both at home and abroad, investment markets mostly delivered solid returns in 2012.
The MSCI All Country World equity index rose 13.4 percent on a price-only basis. Stocks in the U.S. climbed 13.5 percent, as did the EAFE index of international developed markets. The MSCI Emerging Markets index outperformed with a return of 15.1 percent.
The Barclays Global Aggregate high grade bond index delivered a total return of 4.3 percent. At the regional level, the U.S. aggregate return was 4.2, in Europe 12.3, and in Asia -7.0 percent. The returns for below-investment grade bonds were far superior. The Barclay's Global High Yield index returned 19.6 percent, led by Europe with a return of 30.5 percent, followed by emerging markets with a return of 23.8 percent, and the U.S. at 15.8 percent. The benchmark U.S. ten-year Treasury note began the year at a yield of 1.88 percent. After falling to a low of 1.40 in July, it ended the year at 1.76 percent.
In the U.S., the presidential election dominated the political calendar, but it was the actions of the Federal Reserve that exerted the greatest influence on the economy and investor sentiment. The launch of a third round of quantitative easing by the Fed in September, followed by additional easing in December, helped to support equity prices, while the suppression of interest rates contributed to the recovery in housing. Unfortunately, toward year-end the protracted negotiations surrounding the fiscal cliff gave rise to both business and investor uncertainty, causing economic activity to slow and equity prices to stall in the fourth quarter.
Within U.S. equities, the leading sectors for the year were financials, consumer discretionary, and health care. Lagging sectors included utilities, energy, and consumer staples. Large and small companies delivered similar returns.
Commodity returns were essentially flat. The Dow Jones-UBS index fell 1.1 percent on the year. Gold rose 7.0 percent, while crude oil fell by the same amount. And the dollar ended the year essentially unchanged.
As in the U.S., it was the central bank that most influenced markets in Europe in 2012. The ongoing debt problems in the Eurozone threatened to engulf Spain and Italy, until the European Central Bank in July promised to defend the euro through its own program of quantitative easing, if necessary. That promise effectively diminished the threat of national insolvency, triggering a rally in both stock and bond markets. However, despite the stabilization in financial markets, the region's economy slid back into recession in the third quarter as austerity measures continued to weigh on growth.
Japan struggled to overcome deflationary pressures and a strong currency, also falling into recession in the third quarter. A new administration in November promised the equivalent of monetary shock therapy to re-energize the economy, resulting in a year-end stock surge that drove the Nikkei index to a 23 percent gain.
China also welcomed a new administration in the fourth quarter, its first in ten years. Promising to continue the process of economic stimulation begun earlier in the year, it appears that the policy-induced slowdown may have bottomed in the third quarter. In response, the Shanghai Composite index ended the year with a 15 percent gain in December, after falling to a four-year low at the start of the month.
Prospects for 2013
The global economy will likely experience another year of modest below-trend growth in the year ahead. In the U.S., the economy can be expected to grow in the vicinity of 2 percent, with better results in the second half. Housing continues to recover, and manufacturing is strengthening. The first half will be slowed by the ongoing policy uncertainty associated with the need to address the spending side of the budget debate and the postponed sequestered discretionary spending cuts, as well as the pending debt ceiling increase, and fiscal 2013 budget resolution. Despite these headwinds, the outlook for stocks appears to be favorable. Valuations are not excessive, inflation remains subdued, the Federal Reserve remains exceedingly accommodative, and corporate earnings are still growing.
The outlook for bonds is less favorable. The expectation of modestly firming economic activity is likely to push yields somewhat higher. Indeed, in just the last four weeks of the year the yield on the ten-year Treasury note rose from 1.59 percent to 1.76. And after the deal to avert the fiscal cliff, the yield rose further to 1.90 percent. Corporate bonds should continue to benefit from strong balance sheets, but returns are not likely to match those of the past year.
Overseas economies in Europe and Japan can expect to see some improvement in 2013, but robust growth will remain elusive. Nevertheless, stocks in these markets also appear attractive, due to modest valuations, accommodative monetary policies, and early signs of a global cyclical upturn. China's experience will be an important determinant of the pace of that upturn. If China can accelerate its expansion, the beneficial impact will be felt not only throughout the region, but in Latin America, Europe, and the U.S. as well.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
MSCI-All Country World Ex. U.S. Index: Is an unmanaged index representing 48 developed and emerging markets around the world that collectively comprise virtually all of the foreign equity stock markets.
Morgan Stanley Capital International EAFE Index (MSCI EAFE), an unmanaged index, is compiled from a composite of securities markets of Europe, Australasia and the Far East.
Morgan Stanley Capital International (MSCI EMF) market capitalization weighted index is composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The MSCI EMF Index excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners.
The Barclays Aggregate Bond Index is a market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed-rate, publicly placed, dollar-denominated, and non-convertible investment grade debt issues with at least $250 million par amount outstanding and with at least one year to final maturity.
The Barclays High Yield Index covers the universe of fixed rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, and 144-As are also included.
The Dow Jones-UBS Commodity Index is composed of commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange (LME).
The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.
The Shanghai Composite Index is a capitalization-weighted index of all stocks on China’s Shanghai Stock Exchange.
It is not possible to invest directly in an index.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
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