BCN ADVANTAGE: 2011 ANNUAL REPORT
For 2011, the DJIA closed at 12,218, up +5.5%. The Nasdaq closed at 2,605, down -1.8%. The S&P 500 finished exactly where it began the year, closing at 1,258. With all three indexes nearly flat, historians might mistake 2011 for a quiet year – but investors who lived through it know better. On August 8th, the Monday following Standard & Poors’ downgrade of the U.S. credit rating, their namesake index completed its 17% freefall. The markets clawed back half those losses before plunging again – to new lows by the end of September. A classic “demented W” double-bottom had formed, but the roller-coaster ride was just beginning. The S&P 500 was up +17% over 19 trading days from October 3rd through October 28th. Then, on November 1st, Greek Prime Minister George Papandreou shocked the EU – and worldwide markets – with his call for a referendum on the newly proposed bailout deal. European politicians expressed incredulity and dismay. Within days the referendum had been called off (and Papandreou forced to resign), but not before U.S. stocks suffered another 10% decline. Of the 21,000 mutual funds tracked by Morningstar, only 29% beat their benchmarks in 2011 (by contrast, 52% outperformed in 2009, the first year of the market rally). Of the 8,000 funds tracked by Lipper, 92% suffered losses. The average U.S. stock fund lost -2.9% in 2011. Foreign funds performed much worse, losing an average -13.9%. China led all foreign funds down with a -24.0% loss. Japan funds lost -9.8%. Emerging market funds lost an average -20.3%. Europe likely set the stage for the main event: What we can expect in 2013 when the U.S. must begin serious deficit reduction. Austerity does not begin during presidential election years – the federal government will continue to borrow and spend roughly $100 billion per month in 2012, over and above the $200 billion per month we collect and spend from tax revenues. All this spending should continue to lift the U.S. (and world economies) for most of 2012. The average gain for the 28 election years since 1900 is +7.3% (+8.8% if we exclude 2008) and election years with double-digit gains outnumber those with double-digit losses by nearly 3:1. Worth noting, since 1928 there have been six previous years when the S&P 500 finished within 3% of where it started: 1934, 1939, 1953, 1960, 1990, and 1994. According to the Cabot Market Letter: “In the year following a mundane performance, the S&P 500 produced an average gain of 30%, with 5 winning years. The second year out produced a respectable 16% average gain, with four winning years.” Already since Jan 1st, the DJIA has reached its highest close since May 2008. The Nasdaq has climbed more than 10% to its highest close since December 2000. The S&P is up more than 5% but remains below its 52 week high. We need to keep the market’s fast start in perspective: The major indexes have merely returned to their April 2011 highs. Only the DJIA is positive for the 21st century: Since January 1, 2000 (12 years), the S&P is still down -8.4%; the Nasdaq is still down -28.6%. Serious problems remain. The nation has 5.6 million fewer jobs today than when the recession began in December 2007, with 24 million (15.1%) considered underemployed. Case-Shiller data show the housing crash has been larger and faster than during the Great Depression. Prices have fallen 33 percent since the collapse began in mid-2006 and remain near their lows almost six years into the crisis. The national debt recently surpassed $15 trillion and is rapidly approaching the $16.4 trillion debt-ceiling. The debt to GDP ratio has surpassed 100 percent, with the federal government adding $5.5 trillion of new debt (a nearly 60% increase) since 2008. We now owe China $1.132 trillion and Japan $1.038 trillion. This amount of unsustainable borrowing dwarfs what is currently happening in Europe, and must eventually come to an end. My job is to have our clients safely on the sidelines before the effects of real U.S. austerity inevitably take hold.