A Strong Finish to 2010
The fourth quarter of 2010 produced very strong returns for all equity asset classes,
with big rallies in December, as good holiday sales and an improving jobs environment
spurred increased consumer and investor confidence.
Small cap stocks (domestic and overseas), emerging markets, and US and overseas REITS
outperformed global large cap stocks. Aspiriant’s clients are very broadly exposed to
these opportunities and despite relative weakness in developed overseas large cap stocks
(up about 8% for 2010, as a whole, compared to the 15% gain for the S&P 500) and with
fixed income returns generally, at about the 6% level, almost all client portfolios
enjoyed gains well above 10% for the year.
Despite this portfolio performance, on top of the very strong initial recovery in the last quarters of 2009,
the psychic wounds of the severe global financial crisis of 2008 are still not completely healed. Measuring
the S&P 500 and the All Country World Index (ACWI) since the market highs of late 2007, there are still net
declines averaging close to 12%.
It’s important to emphasize that there was nothing magic about those late 2007 levels that somehow the
markets “owe” to investors. And if, as we believe is likely, the market measures someday do reachieve those
levels, it won’t mean that markets are then finally “safe” once more. Decisions that need to be made today shouldn’t
wait till a former high water mark has been conquered. Volatility will always be with us. But, given current equity
valuations relative to earnings, levels like those of late 2007 could well have more rational and durable economic
underpinnings than prevailed at that time.
A Look Ahead to 2011
So, we believe that there is good reason to be optimistic about the year ahead. The overall jobs picture is beginning to look brighter (fewer new jobless claims, more new jobs) and the domestic residential real estate market is showing some positive signs. Interest rates are likely to remain very low for an extended period (probably at least through the end of this new year) and there is still a mountain of cash waiting to be deployed. Price/earnings ratios are still in their normal historical range, with corporate earnings looking brighter as the economy continues to improve. Most commentators are looking for 3% growth in the domestic economy for 2011.
We believe there is little risk of significant inflation due to still much under-utilized capacity, slow growth in employment, and a Federal Reserve which promises to put on the interest rate brakes to avoid inflation if need be.
Still, there are plenty of risks. Terrorist threats continue to unnerve many investors and “rogue” nations like North Korea and Iran remind us that not everyone wants to play by our rules. The war in Afghanistan looks unwinnable and its nuclear neighbor, Pakistan, unstable. The sovereign debt crisis in Europe could re-erupt in countries beyond Greece and Ireland and we have our own potential crisis in municipal finance brewing here at home. Our Chief Investment Officer, Jason Thomas, comments on the current municipal bond environment in the article following this.
The November election brought some - temporary - clarity to the US income and transfer tax situation with results that are generally very good for our clients. See the extended discussion by Kacy Gott, Ray Edwards, and Clay Stevens in the concluding article of this issue. Nevertheless, the problems of the US fiscal deficit and national debt are still with us. The Bowles/Simpson panel’s cries for immediate and substantial measures to attack these problems achieved no traction. So far at least, the US isn’t taking any cues from the austerity measures being adopted by many European countries. The new, more conservative Congress may force moves in this direction, with long-term positive economic benefits, but with lots of short-term trauma that could further unsettle markets.
On balance, we think the positives are likely to prevail, with riskier assets continuing to re-prove themselves to their many skeptics.
We, of course, are always available to our clients to discuss these issues in further detail, to carefully review their relevance to each of those clients, and to help our clients optimize the
impacts for their specific circumstances.