News Releases
Monthly Investment Update – December 2009
Markets in Review
The equity markets finished the month (and the year) with a strong showing. In contrast to previous months, the small and mid-cap indexes significantly outperformed the large-cap benchmarks. Although December's market performance might be considered an impressive end to an impressive year, the three-year equity returns are still in substantially negative territory, with a three-year investment in the S&P 500 Index worth approximately $0.84 on the dollar at the end of the year. A review of the three-year cumulative returns shown below illustrates the benefits of diversifying between different asset classes, such as bonds, stocks and commodities. (Notice the large differences in three-year returns among the various indices.)
Fixed income market returns were mostly negative for the month, with the notable exception of the high yield bond sector. The Barclays Capital Corporate High Yield Index gained 3.28% in December and finished 2009 up 58.21% for the year, whereas the Barclays Capital U.S. Aggregate Index lost 1.56% in December and finished the year up 5.93%.
The negative correlation between gold and the U.S. dollar continued to hold in December. The U.S. Dollar Index rebounded 3.98%, while gold dropped 7.01% during the month. However, even after December's decline, gold still outperformed the major equity and fixed income asset classes over the past three years, returning 72.29%.
- Alex N. Rasmussen, CFA CPA
Investment Officer
| Market Stats (as of 12/31/2009) (source: Bloomberg LP) | |||
|---|---|---|---|
| MTD (%) | 12-Mth (%) | 3-Year* | |
| DJ Industial Average | 0.95 | 22.68 | -9.06 |
| S&P 500 Index | 1.93 | 26.47 | -15.94 |
| S&P 400 MidCap Index | 6.27 | 37.38 | -5.43 |
| Russell 2000 Index | 8.05 | 27.17 | -17.13 |
| EAFE(net) Index | 1.44 | 31.78 | -17.05 |
| DJ-UBS Commodity Index | 1.98 | 18.91 | -11.06 |
| BarCap US Aggregate Index | -1.56 | 5.93 | 19.25 |
| BarCap High Yield Index | 3.28 | 58.21 | 19.02 |
| Gold (spot price change) | -7.01 | 24.36 | 72.29 |
| U.S. Dollar Index (DXY) | 3.98 | -4.24 | -6.92 |
| * Cumulative holding period total return. | |||
Action Items
When perceived risk is absent, investors become emboldened. We can point to the "VIX" index which tracks the price people are willing to pay for protective stock options. When the VIX is low (it recently dropped below 20) it means investors are not afraid of risk. When investors get complacent the market has a tendency to prod. That hasn't happened, yet, as the S&P 500, currently up 70% from the March low, continues to creep higher.
By and large we kept to our knitting in December. We continued to carry larger than normal cash levels and concentrated buying on the dips. This was mostly in the commodity area, specifically sectors like agriculture, energy, metal bullion and mining. During the month we also wrapped up our efforts to neutralize any realized 2009 taxable gains for applicable client accounts. Gold is hitting new highs, what with India's central bank making a big purchase, continued worries about the U.S. dollar and government spending. The economist John Maynard Keynes dismissed gold by once calling it a "barbarous relic", but we think that there is a right time for every investment as well as a wrong time for every investment. It's worth noting that within the next 12 months, the Treasury will have to refinance $2 trillion in short-term debt and additional deficit spending is estimated to be around $1.5 trillion. Together they represent $3.5 trillion or roughly 30% of annual GDP.
We also say good riddance to the decade of the "aughts". Zero net job creation was a first in six decades. It was the first decade since the 1960's where income fell and American net worth declined when adjusted for inflation, when every decade since the 1950's has showed sharp gains. The worst stock market decade in history featured the S&P 500 declining 24%. You'd have to go back to the 1930's to find anything remotely similar. Looking forward we would like to see a normal market correction or pause which would allow us to take off our short position in "SH" and put our cash to work in more international, commodity related and other sector equity mentioned in previous updates. We also plan on reducing our longer-term fixed income maturities and broadening our fixed income to include high-quality, un-hedged international debt.
- Jerry R. Bayer, CFA
Vice President, Lead Trust Investment Officer
20100071