“2011 – The Year in Stats”

Sydney M. Williams

Thought of the Day

“2011 – The Year in Stats”

January 3, 2012

In the continuum of markets, January 3rd is nothing more than the first trading day after December 30th, but the calendar adds weight to the date. As investors we are provided a clean slate. We have been absolved (momentarily) of our errors and provided an opportunity to start anew. We resolve not to fall for the insidious and tempting traps that are placed before us; yet we know full well that will be one of first resolutions broken. Our desire to succeed too often makes us reckless.

In retrospect, the U.S. stock market in 2011 was reminiscent of a college road trip: We traveled a long way, but ended where we started. We had good times, but we also did things that we regret. We got high, and then sobered up. We left filled with optimism and arrived back home somewhat the worse for wear, wondering – was the experience worth the expense? Or was it “a whole lotta nothing?”

Earnings rose, as did dividends; so that stocks are less expensive today than a year ago. On the other hand, governments did nothing to curtail spending, so that federal debt is higher than a year earlier. Congress and the Administration seem incapable of accepting reality. The Federal Reserve kept interest rates artificially low, creating the potential of a Tsunami when they are finally unleashed. Our problems pale in comparison to those in Europe, and China’s economy looks to be slowing. Both adding weight to the load we must bear. Here at home, nothing was done about a pending crisis in terms of obligations promised by governments (and unions) that can never be honored. Congress continues to function like characters in Alice’s dream-like Wonderland. Unsurprisingly, their approval ratings are substantially below that of Lindsay Lohan.

There are about 255 trading days in a given year. The S&P 500 closed flat on the year, while trading within a 24% range during the last year’s approximately 255 days. During the year the Dow Jones Averages closed up or down 1.5% on 52 days, 45 of them in the last six months, and closed the year up 5.5%. The total return for the DJIA, including dividends of 3.01%, places the year close to the long term average return. But, somehow it didn’t feel that way.

U.S. Treasuries provided the year’s best gains, with the yield on the Ten-Year declining 43.2 percent and the yield on the Five-Year falling 58.7 percent, implying significant capital gains. The Yield Curve remained relatively steep, though began to flatten in the second half. Reflecting that flight to quality, emerging markets had a tough year, with India declining 39.8 percent and China’s small cap stocks falling 35.8 percent.

With the exception of oil and gold, commodities declined over the year, with most of the loss coming in the last nine months. In sympathy, Australia and Canada’s equity markets were down 15.7 percent and 14.2 percent respectively.

In the U.S., large cap stocks did better than small caps, and growth outperformed value. Nevertheless, equity mutual funds lost assets to bond and money market funds. Importantly, however, dividends on S&P 500 stocks rose 18.7 percent.

There are other factors worth noting: 1) Money supply expanded 9 percent, something to be monitored, as inflation in 2011 grew at 3.2 percent (2.8 percent in the 1st half and 3.6 percent in the second half.) November inflation numbers are 150 basis points greater than the yield on the Ten-Year. Either inflation will moderate or holders of U.S. Treasuries are in for a rude shock. 2) Volatility has declined in the past six weeks, as measured by the VIX and in terms of daily volatility. That fact, along with companies continuing to increase dividends, may bode well for stocks in 2012. 3) GDP growth has been anemic. During the first three quarters of 2011 GDP growth averaged 1.2 percent, versus 2.6 percent in 2010 and 4.2 percent in the second half of 2009. Modest and slowing economic growth, with persistently high unemployment, will raise concerns about Mr. Obama’s re-election prospects. Expectations are that 2011’s 4th quarter GDP will show acceleration, but 2012’s growth will be challenged by Europe, which appears to be slipping into recession, and what appears to be a slowdown in China. And 4) Meredith Whitney was proven wrong (or early) in her expectation of a number of municipal failures. The municipal bond I-Shares rose 7.2%. Price appreciation plus interest provided about an 11% return in 2011.

Attached are some numbers for 2011 from a work sheet that I look at. When considering myriad economic and market data and trying to make sense of so many conflicting statistics, I am always reminded of what Bruce Hackett, one of my many bosses at Salomon Brothers, used to say: “My mother never said it would be easy!”

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I will be out for a week of skiing, again providing relief to those who read my daily musings. However, it is possible that the foibles of individuals or the quirkiness of events may prove irresistible, and I will be unable to restrain myself.