February 2012 Client Letter

Last year was an unpleasant year in global equity markets. Modest gains in the S&P 500 (+2%) masked steep declines in most equity markets throughout the world. Of the 23 developed equity markets, only two were up in 2011—the U.S. and New Zealand. Of the 21 markets that fell, 17 were down double digits, with a handful of those down more than 20%. Emerging equity markets fared even worse. Of the 25 emerging equity markets that Young Research tracks, only three finished the year in positive territory. Close to half of the world’s emerging stock markets fell more than 20% in 2011.

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January 2012 Client Letter

One of the more common mistakes individual and even professional investors make is ignoring or underestimating future events. During the past three years, both the Dow and the S&P 500 posted positive returns. While 2012 could certainly be another favorable year, investors would be well advised to expect continued periods of high volatility.

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November 2011 Client Letter

Here is one problem facing investors: during August and September, the Dow Jones Industrial Average rose or fell by more than 1% on 29 days. By third quarter’s end, the Dow was down 12%, the largest quarterly percentage decline since the first quarter of 2009. This degree of volatility, which of course is great fodder for the media, can lead to knee-jerk decisions that send investment strategies off course.

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September 2011 Client Letter

Over recent years, we have advocated and pursued what we consider to be a defensive investment strategy. Our caution has centered on the troubling condition of the global economy. Today, the world’s largest economic players face powerful structural headwinds likely to constrain economic growth. Yet many economists, policymakers, and investors have operated with an optimistic outlook. We contend that problems exist and that many financial assets are not reflecting this reality.

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August 2011 Client Letter

August has been a stark reminder of the serious challenges facing investors. Those lulled into a sense of complacency from double-digit market gains in 2009 and 2010 were rocked back to reality this month by three events. 

On Thursday, August 4, the Dow Jones Industrial Average posted its worst point-drop since the financial crises in December 2008. More bad days followed as the Dow dropped 4% during the week of August 15. For the month, the Dow was down almost 4.4%. Concerns are broad. In the U.S., the economy had been much stronger in the first half of last year compared to 2011. Real GDP rose at an annualized rate of 3.9% in the first quarter of 2010 and 3.8% in the second quarter. For 2011, GDP rose at a rate of 0.4% in the first quarter and 1% in the second quarter. In Europe, a debt crisis, which began in Greece, is widening to include far larger economies of Spain, Italy, and even France. While the U.S. has been officially out of recession for two years, the economy is still on shaky ground. If Europe can’t contain its debt crisis, the global economy could suffer a serious blow. Stock market volatility remains a threat.

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May 2011 Client Letter

I sure would feel more comfortable if an attractive interest-rate environment accompanied today’s stock-market gains. While the Dow is up over 7% YTD, the yield on a five-year Treasury note is a lowly 1.7%. But a competitive interest-rate environment has not been a priority of the Federal Reserve. Instead, the Fed has kept its core short-term interest rate near zero while spending heavily on bonds to keep longer rates low.

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April 2011 Client Letter

In March, I met at our Naples office with Cato Institute chairman Bob Levy and cofounder and president Ed Crane. The goal was to increase my awareness of Cato’s research efforts and to review federal budget policies of the U.S. government. The Cato Institute is a public policy research organization dedicated to the principles of individual liberty, limited government, free markets, and peace. Cato has 13 primary research areas, including finance, banking and monetary policy, government and politics, and international economics and development.

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February 2011 Client Letter

The value of the U.S. stock market has doubled from its March 2009 lows and has vaulted almost 30% since this past August. Fueling the bull stampede is the Fed’s continued ultra-accommodative monetary policy, improved economic momentum, a pre–presidential election year (the average stock-market return in year three of a presidential cycle is 17.5%), and investors’ rising risk appetite (flows into stock funds are on the rise). Wall Street strategists seem optimistic: recent average price targets for 2011 project that the S&P 500 will reach 1,400, an 11% gain.

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December 2010 Client Letter

With momentum appearing to be behind the stock market, now may be a good time to review one of the most important considerations of investing: risk. Risk tolerance varies among individuals and even varies for the same individual during different market environments and time periods. Because an investor’s tolerance for volatility is subjective, risk tolerance can be difficult to measure precisely.

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November 2010 Client Letter

In the early 1980s, the stock market’s tank was fueled up and ready to roll. Short-term interest rates had topped 19% by January 1981. In October 1981, 30-year mortgages were 18%. As interest rates began a two-decade secular decline, the stock market exploded. From August 1982 through March 2000, the S&P 500 returned an amazing 19% a year, nearly double what it had returned the previous five decades. A whole generation of investors grew accustomed to a seemingly endless run of asset growth.

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