January 31, 2012

2011 was a wildly volatile year that left investors with little to show for it. Large U.S. stocks gained only 2.1% on a total return basis, while small stocks lost 4.2% and international stocks lost 11.7%. Although taxable bonds gained 5.8%, yields remained painfully low. Headlines often fueled wide daily swings in the market.

Yet throughout 2011, our clients remained calm, focused on their long-term goals, and stayed invested in their balanced, diversified portfolios. A long-term perspective will serve them well in 2012. We expect persistent U.S. market volatility through the election and beyond. But we also anticipate continued slow to moderate economic growth, which in turn will slowly reduce the unemployment rate. Corporations, enjoying extremely strong profits, are much healthier than they were in 2008, which will help them to withstand swings in consumer spending.

The European Union is likely to struggle with long-term solutions in 2012, as increased government yields and austerity measures could drive the E.U. into a recession. While the situation in Europe could worsen, stock markets may have already priced in most of these concerns. China’s economy is hoping for a soft landing as the government may inject a stimulus plan in 2012 to increase domestic consumption. Emerging market countries in general have much lower debt to GDP ratios than developed countries, so they can add stimulus to their economies if needed. We will maintain our watch on the European debt situation—and on developments in the global economy—for new opportunities.

Strong demand for Treasuries in 2011 drove up prices and widened the yield spread between Treasury bonds and corporate bonds well beyond the historical average. As a result, Treasuries are now relatively expensive. Interest rates in 2012 may remain at extremely low historical levels but the risks of owning longer term bonds, especially Treasuries, outweigh the benefits. To mitigate these risks, we have maintained a shorter duration and have favored corporate bonds over Treasuries. Tax exempt bonds enjoyed a favorable year as the default scare of 2011 proved overstated and the recovering economy is boosting states’ revenues.  We continue to maintain national exposure and a low duration to help protect our clients from risk related to troubled states and to low interest rates.

Gold benefits those clients who hold it because it flourishes in negative real interest rate environments, such as the one most of the world is currently experiencing. Since we expect negative real interest rates to persist through at least 2013 or 2014, we will not rebalance at this time, holding gold and silver exposure at current levels.

Since we entered the investment advisory business in 1971, we have experienced more than four decades of market ups and downs. As a result we are uniquely qualified to offer expert advice to clients in a variety of market climates. At Towneley, we know that each client’s circumstances are unique and deserve personal attention. Our clients value our commitment to their financial goals and our attention to each account, creating a relationship based on trust and the wisdom that comes from experience.