Happy New Year, everyone! Welcome to another exciting year of investing. It will no doubt be packed with rousing headlines like we saw in 2011, especially considering it’s an election year.
What a time to be a money manager. With the U.S. downgrade in August, a two-year credit crisis in Europe still brewing, and slowdown in China, the World stock index was down over 7% last year. Yet, at the same time, interest rates continued to decline and the 10-year U.S. treasury bond is now yielding under 2%! It hasn’t been that low since 1941 at the end of the Great Depression!
Few expected bonds to outperform stocks at the beginning of last year, but just look what happened and how many “expert” predictions went wrong:
• PIMCO’s Bill Gross called for U.S. Treasury bond prices to drop significantly and interest rates to spike upwards. The opposite happened.
• Goldman Sachs’ big call was to make large-cap commercial banks one of its top trades for 2011. An ETF based on a Bank Index was down 24% last year. Goldman also pegged year-end S&P 500 at 1450. We’re at 1302 as I write this!
• JP Morgan’s David Kelly predicted the S&P 500 would be at 1400, the year-end 10-year yield would be 4.25%, and the Fed would raise rates in November. The Fed didn’t raise rates and the 10-year ended below 2%.
• Barclay’s Barry Knapp had GDP at 3.1% for the year and the S&P 500 at 1420. The 3rd quarter 2011 GDP was at 1.8%.
• Merrill Lynch’s David Bianco had a 1400 S&P target and 10-year treasuries at 4%.
• Morgan Stanley also called for a 4% interest rate for the U.S. 10-year, in addition to 4% U.S. GDP growth.
Remember these inconsistencies when you’re watching TV or reading the papers, especially at this time of year when every other show contains some sort of prediction for 2012. Don’t listen to the prognosticators. Markets, like human beings, are unpredictable.
So where do we go from here?
Despite all these issues, we feel strongly that stocks (owned through mutual funds, not individually) are where you need to be right now.
After the past couple of years bonds have started to look extremely expensive given the historically low yields. And it’s true that over the past 30 years US bonds have outperformed stocks, but because of this bonds have become really expensive.
In addition, the past couple of years have shown stocks (especially international stocks) to look really cheap based on many different valuation methods.
So what does this mean for the long haul? It bodes well for stocks considering they tend to have above-average returns after long periods of underperformance like what has occurred.
As always, we are here to help you reach your goals and help you stay on the right path with your hard earned money. Please contact your Redwood advisor if you’d like more details.
Lane Steinberger CFA, MBA, CFP®
Partner, Chief Investment Officer