As we end a difficult year, we are left with a great deal of uncertainty as to where the short term will lead us.
This past year was one of the most confounding to market participants in memory. After a fairly positive start, the year turned into a nightmare of extreme volatility and market gyrations. Those who follow market trends or use fundamental analysis were left equally unhappy by year’s end. There was simply no rational formula or concept that would help you invest in this market. It was a market that became dominated by emotions and headlines rather than economic and company fundamentals. As the year wore on, the only thing you could count on was for everything to reverse every few weeks. As a result, you needed to decide how much you cared to be involved in this market at all and to what degree you could focus on the long term versus the headlines and poor short term results.
Specifically, the year savaged international markets, including both developed and emerging markets. While that could continue into 2012, we think there are still compelling values in emerging markets for the long term. Emerging market countries have lower government debt, burgeoning middle classes and better demographics than the developed world. This should yield better long term results for their stock markets. However, we would still expect these markets to experience more volatility than developed markets going forward, giving you a rather rough ride as we move forward.
Domestically, we would suggest that a viable long term strategy is to stick with high quality stocks. These stocks are trading at rather low valuations compared to historic norms, some have attractive dividends, and the companies have considerable cash and impressive balance sheets. If you are willing to purchase for the long term, now may be a buying opportunity. If you are expecting immediate results, maybe keeping your money in the mattress is still the best idea.
On the fixed income side of the equation, 2011 favored US Treasuries over all other assets. In a year in which US government debt was downgraded, this seems an odd outcome. We don’t know when, but…..someday we will see rising rates on US Treasuries and poor total returns on them. The area that seems to be most undervalued to us at this point is the municipal, tax free bond world. There is some added risk there, but it seems to us that investors are being richly rewarded for taking on that risk.
At any rate, we hope to keep our eyes on the longer term at this point. We don’t want to take on too much risk in this market, but believe that we should very selectively add risk for the long term.