2011 was a year of alternating hope and fear in the global stock market. After a very positive first half of the year, the global stock market became very volatile, ending 2011 down -7.7%. In general, our portfolios did not suffer this loss, and several positions were positive for the year.
When 2011 began, conventional wisdom predicted strong performance for emerging market stocks and weak performance for U.S. treasury bonds. The result was the opposite. Emerging market stocks lost 20% for the year and the typical bond index gained 7%. The conventional wisdom is not always wise.
As we enter 2012, governments across the world are struggling with high debt, slow growth, and difficult choices between cutting spending and risking slower growth, or adding stimulus and risking higher debt. The risk of recession and potential for economic growth are both present, like a playground “teeter-totter.” If employers, banks, consumers, and investors lose confidence in each other or in their governments, then employers will not hire, banks will not lend, and investors will sell their risky assets. If confidence rebounds due to higher corporate profits, stabilized unemployment, increased cooperation in Europe, and renewed Chinese stimulus, investors might find stocks attractive at current prices.
Since both ends of the “teeter-totter” seem realistic, we are maintaining allocations to both safe haven assets to protect against loss and more opportunistic investments that will appreciate if any good news surfaces.
We are in the process of adding a permanent allocation to high yield bonds, consistent with our tactical purchase of high yield bonds last summer. We believe these bonds to be opportunistic both due to the yield and due to reasonable pricing relative to historic levels. We also continue to emphasize yield in U.S. stocks with positions in a MLP fund and the addition of a utilities ETF.
We have also added a permanent allocation to gold as a separate asset class. We previously held a small allocation to gold in our broad commodities fund. Gold is a safe haven asset in a fearful environment and an excellent hedge against devaluing currencies and inflation. Gold prices have also declined, presenting a reasonable price entry point.
We will also likely purchase another structured note in the 1st Quarter to add hedged stock exposure to most portfolios. A structured note is a bank instrument that allows us to capture stock returns up to a cap, and in return for the cap, the buyer receives downside protection if the market declines. The 18 month note we purchased in November caps stock market gains at 17%, but provides downside protection up to a 15% market decline. We find the opportunity to earn almost 1% a month for 18 months with 15% loss protection very attractive.
On behalf of everyone at Wagner Wealth Management, we wish you a very Happy New Year.
The Wagner Wealth Team
* Information provided should not be construed as investment advice and is not meant to be taken as a recommendation to buy or sell. The financial situation and investment objectives of each individual must be considered for suitability prior to any recommendations being made.