4th Quarter Client Note

It is sometimes said that the stock market climbs a “wall of worry” – meaning that it overcomes uncertainty, or even bad news. By any measure, that is what happened in 2012. And there remains plenty of uncertainty for 2013.

Believe it or not, this year will mark the fifth anniversary of the 2008 financial crisis and the beginning of the great recession. The subsequent economic recovery has been the weakest in post-war history. GDP has grown just 2.4% annually compared with an average of 3.4%. Doom and gloom headlines abounded in 2012, including reports of the incredible damage to the northeast coast caused by Super Storm Sandy. The presidential election focused almost entirely on the economy and what policies should be engaged to encourage stronger growth. Following the election, stories about the so-called “fiscal cliff” were ringing in our ears.

In the face of all this, stock markets around the world achieved extraordinary gains. Despite a flat (-.38%) fourth quarter, the S&P 500 Total Return Index gained 16% in 2012. The annualized return for the past three years has been 10.87%. In March, capping a 4 ½ year grind, the index finally surpassed the high set in October, 2007 and ended the year 3.3% above the previous high – not entirely out of line with past peak-to-peak recoveries.

Markets around the world had similar gains. The MSCI EAFE Index gained 17.32%. The Emerging Markets Index, despite slowing growth in China, was up 18.22%.

Looking Forward

Corporate earnings have been strong and investors will continue to monitor them. Auto sales and manufacturing have been picking up. And even the housing market is beginning to come back to life.

But we still need to deal with the unfinished “fiscal cliff” business – including reaching agreement on raising debt ceiling, the $1.2 trillion across-the-board spending sequester and the continuing resolution (or even better, an actual budget) to fund the government.

Of course, uncertainty is never going to disappear as a challenge to investors. Otherwise we could record our gains the moment we committed our funds. So try not to worry too much about climbing that wall. Or even the occasional fall.

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