4th Quarter 2010 and Year End Commentary

Posted on Thursday, January 27th, 2011

by James W. Heard, CFP®, President, Windham Brannon Financial Group, Inc.

Investments and Markets

In one Seinfeld episode, George Costanza became so frustrated with his inability to make good decisions that he decided that from that point forward, he would do the opposite of what he thought he should do.  “What could it hurt?”, he thought.  Suddenly his fortunes began to change as one after another of seemingly counterintuitive decisions turned out to be good ones.

2010 was a lot like that.

Although markets often don’t follow the tone of current events, this year’s markets seemed particularly disconnected from the news.  Investors who tried to time the markets based on events of the day or how they felt would have been better off doing what George did – the opposite.

The following are just a few news items that indicated that 2010 should have been a tough year:

  • The “January Indicator” signaled poor stock market performance for the remainder of the year.
  • Almost every market analyst expected interest rates to rise and bond prices to fall.
  • An Economist cover story in January warned that US stocks were “nearly 50% overvalued”.
  • A prominent researcher who had predicted the Great Recession was expecting the “biggest coordinated asset bust ever”.
  • A tragic drilling rig explosion in April produced what initially appeared to be an ecological and economic disaster in the Gulf of Mexico.
  • A bewildering “flash crash” on May 6th saw the Dow Jones Industrial Average plummet over 1100 points in a few frantic minutes, bringing into question the stability of capital markets.
  • A bitterly divided Congress passed a complex and potentially expensive healthcare reform bill that few lawmakers actually read or understood.
  • A financial crisis with no clear solution gripped governments in Spain, Greece, Portugal and Ireland.
  • For the six months ending June 30, the S&P 500 was down over -5%, having fallen -11% for the 2nd quarter.

And there were more.

Despite the seemingly strong headwinds, the “Costanza” market as measured by almost any index had a very good year.  See market data below.

Q4 2010 Year-to Date Last 3 Years
90-Day US Treasury (T-Bills) 0.04% 0.14% 0.60%
BarCap Interm US Govt/Cr (Bonds) -1.44% 5.89% 5.40%
S&P 500 (US Large Cap) 10.76% 15.06% -2.86%
Russell 2000 (US Small Cap) 16.25% 26.85% 2.22%
MSCI EAFE (International) 6.61% 7.75% -7.02%
US REITS (Real Estate) 7.45% 28.07% 0.01%

I’ve included three-year numbers to illustrate that most of our clients have recovered much that they considered lost in 2008 and early 2009.  This assumes, of course, that they stayed fully invested during the 3-year period from the end of 2007.  Three-year numbers that stand-out to me are the surprisingly low return on Treasuries and the “break-even” return of the real estate index.

 

Economics

The deficit is unsustainable and cannot be materially lowered without reforming entitlements.  Period.  End of story. There.  I’ve said what nobody else wants to say.  And until most of us are willing to say it, our financial future in this country is at risk.

This isn’t rocket-science.  We can’t promise more than can be delivered.  Here’s the good news – not only can the problem be solved, I believe it will be.  Capital markets (in this case, interest rates) will impose discipline on those that are unwilling to impose it on themselves.  Mr. Market is going through his checklist – “Greece…check, Ireland…check,” and while the U.S. may be down the list a bit, I can assure you that we’re on it.  We can make changes now or wait for the screaming to start when interest rates rise dramatically.

 

Politics

Wow! The electorate expressed their discontent in 2008, and they were still angry in 2010 …well…REALLY angry.  I think much of it has to do with the item above.  The merging of economics and politics continues, and vapid promises will be punished in every election cycle until we get serious-minded leaders in office.  The Democrats were given a chance.  Now it’s the Republicans, but I think most agree that neither has received any vote of confidence.

 

The Year Ahead

I don’t make prognostications, so I won’t start now, but I will say this.  I’m optimistic.  The economic realities are in the news every day, and from that will come viable solutions.  I believe we are just now laying the groundwork for real fundamental change in economies here and abroad.  The democratic process is frustrating to watch, but the outcomes over time compared to other systems are compelling – we reach decisions in the long run that just work better.  In the interim, markets will inevitably surprise with returns in either direction.  Fortunately for you, it shouldn’t matter as we do our job of aligning your portfolio with your goals and time horizon.

 

What’s New

As you know by now, in what should be viewed as the best news of the year, we’re merging.  Tarpley & Underwood Financial Advisors and WBFG are merging along with each of our CPA affiliate firms.  We’ve already said a lot, and you’ll learn more as we meet with you, but it’s great news for all involved.

Thanks for having faith in our process.

Here’s to another great year!

 

 

 

 

 

© 2011 Windham Brannon Financial Group, Inc. All rights reserved. Any use of information contained in this article, including reproduction, modification, distribution or republication, without the prior written consent of Windham Brannon Financial Group, Inc. is strictly prohibited.

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