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February 2012 Investor Letter

Dear Investors,


It’s already been a great year for stocks, and we’re only a month into 2012.  January was the best first month of the year since 1997 with the S&P 500 finishing up over 4%.  Historically, such a strong January has been a positive indicator for the rest of the year.  Since 1957 there have been 17 times that the S&P 500 was up 4% or more in January.  In those 17 years, the S&P was up an average of 21.5%, and returned double digits for the full year 16 out of 17 times.  By comparison, the average return for all other years is only 8%.


While the historical patterns point toward a great year for stocks, my advice would be to temper one’s expectations.  A 20%+ return would be a welcome-but-unlikely scenario for 2012.  Even though I remain optimistic for the year ahead, it’s hard to envision returns exceeding high single digit or low double-digit levels.  For reference, a 20% return would mean that the S&P 500 would close the year at around 1508, just 50 points away from its all time high.  At that level valuations for stocks would be stretched, and would justify raising significant amounts of cash in our portfolios.  Given the economic landmines scattered across the globe, I would be much more surprised if the S&P 500 touched 1550 than if it touched 1150 at some point this year.


For now these economic landmines don’t seem to hold the same gravitas that they did just a few months ago, but that shouldn’t be an indication that they have faded away completely.  If January demonstrates anything, it’s that the opinions of the marketplace can swing rapidly.  Sitting in August or September of last year, recession seemed a certainty.  Sentiment changed though and now it appears that the US economy is in the clear.  To think that we will go the rest of the year without that opinion swinging to a more negative outlook would be unrealistic.  The unfortunate truth is that the higher the market climbs to start the year, the more likely that investors will be in for another wild ride to close it. This doesn’t have to be a negative situation though.  As last year proved, careful investors benefitted greatly from the chance to buy at discounts. 




Focusing on our portfolios, I was quite pleased with our performance in January.  Even though we hold high levels of cash, which should create a drag in an up market, almost all of our portfolios did better than the market did.  This means that the individual investments that we hold have done particularly well.  Specifically gold, which is the most widely held asset by clients, did very well to start the year.  It reversed the lackluster performance that the commodity has suffered from since the beginning of September.  Gold benefitted from the same factors that pushed the rest of the market higher: global central banks signaled continue willingness to depress interest rates in order to boost asset prices.  In December the European central bank performed LTRO operations, which are effectively a European form of Quantitative Easing.  Meanwhile, in January the Federal Reserve promised to keep interest rates at zero for three more years–through 2014.  This is not a promise that I expect the Fed to be able to keep as inflation picks up going forward, but for now it’s sparked a nice stock market rally.  Just make sure not to get overly excited by it.


Scott Krisiloff, CFA
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