Welcome to a new year…

The markets finished 2011 with some momentum and, for the first several weeks of January that momentum fed into 2012.  The markets seem to have begun the year with a sense of relief, almost as if to say, “It simply feels better now that we’re not in 2011”. While it is not based on empirical data, market participants are almost giddy to start the New Year.

There remain a myriad of positives and negatives in this economy, which is why we saw no real headway made last year.  The European debt crisis continues to be the most negative headwind we are presently facing.  As of this writing, it appears they may have hammered out a deal to write down/swap much of the troubled Greek debt, which would have some positive ramifications for the Eurozone.  The problem is, we have seen this story before and the markets are very cautious to anticipate this.  On a positive note, the economy technically remains on reasonably solid footing.  Our channel checks point to an economy that grew 3+% in the fourth quarter and that, in perspective, is a good number.  Keep in
mind that we continue to believe what we’re seeing in our economy is more a “crisis of confidence” than a wealth problem.  Earnings remain strong and corporations are hoarding cash.  With the Eurozone issues and the political gridlock we’re experiencing, companies simply don’t have the confidence to go out and expand their businesses.  However, a change in confidence with markets can develop quickly and we believe that at some point in 2012 that could very well happen.

In looking at historical tea leaves, let me mention that we actually have a couple interesting tidbits working in our favor coming into 2012.  First, the fourth year of a presidential term typically has a positive bias in the markets.  Conventional thinking is that it is because investors feel the “ship will be righted” in the next four years.  Also, for whatever it is worth, but true nonetheless, years that end in “2” have historically shown outperformance.  Obviously, these types of  outperformance precedence aren’t set in stone.  But, it’s nice to know we may have a slight edge coming into this election year.

With another year in the history books, we press on looking for extended economic visibility.  The markets continue to be mired for the time being.  Perhaps the greatest impediment to sustained market growth is the lack of clarity we currently are experiencing across the political spectrum.

Frankly, many of the fundamentals of our economy are improving:

1. GDP growth appears to be accelerating with our  current channel checks coming in around 3.5% annualized.  If sustained at this level, it would be strong enough to create new jobs.  Obviously job growth is the primary driver to consistent economic growth.
2. Christmas sales have been remarkably strong, with online retail leading the way with a 7% increase year over year.  While consumers have continued to spend, the high numbers of unemployed consumers has kept a cap on the economy.

However, the other 2 negative factors which we must ultimately solve for sustained economic health are:

1. The European sovereign debt issue… a long-term solution must be forged out.  So far the crisis has been dealt with by applying various short-term band aids.
2. The U.S. debt issue… Our aggregate national debt has now reached 100% of our annual GDP this is a level we have not experienced since WWII.  Obviously, until there is a long-term political solution to this it will continue to plague our economy and thus our markets.

We would hope that the 2012 elections will provide some clarity for our economy and markets.  In the meantime, we will continue with vigilance to find niches of opportunity while exercising a cautions perspective.

On behalf of our entire team, I leave you this month with my most sincere best wishes for the 2012 New Year.