April 2012 Investment Journal
Stocks finished April with a slight decline of -0.7% after rallying 2.25% on the last 5 days of the month. Bonds, which are not highly correlated to stocks, returned 0.9%. Developed international equities continued to grapple with debt issues during the month, declining -2.1%. Gold was flat and has underperformed equities year to date, but has held up very well over the last several years as seen in the chart below:
Recent U.S. economic reports have shown deterioration in growth over prior reports this year. The non-manufacturing (services) sector in particular declined to its lowest level of growth in 2012, and also had its largest one month decline since last April according to the Institute for Supply Management (ISM). This report relies on data from the U.S. service sector, which represents a large and important portion of the U.S. economy. A recent article from ZeroHedge.com well articulates the growing possibility of a global economic slowdown and the probable causes which include Europe's Recession, China's recent sluggish growth, and the U.S. fiscal problems. It's worth noting that most of the data released in April supports the notion of weakening growth.
On the monetary policy front, Ben Bernanke's "Operation Twist", which was intended to force savers out of U.S. Treasuries and into more risky assets, comes to an abrupt stop at the end of June. Since October 2011, the Fed has purchased approximately 90% of U.S. Treasury bonds issued with a 20 to 30 year maturity. In other words, they are THE buyer of long-term bonds.
During the prior periods of Quantitative Easing (QE), risk assets like stocks reversed sharply as the QE programs came to a close as shown on the chart below. Both of the prior sell-offs (indicated by black arrows) also coincided with increased global fears about Europe's sovereign debt crisis:
Like the real economy, the stock market has been lifted by massive amounts of new money entering the system. The end result, though, for both is mixed: not much progress overall, and weaker fundamentals ahead as the ramifications of paying off the debt sink in.
In Europe, the probability of another "risk-off" episode is growing, with Spanish bond yields now close to their July and November peaks of last year:
In France, the election on May 6 will likely bring about a new Socialist President, which will have meaningful repercussions for the French (and global) economy. As in Germany, French voters are tiring of bailing out wayward EU brethren, and are set to evict the incumbents. Look for more rhetoric, and perhaps quick action, from a new "France First" government that will not be as cooperative with Germany in implementing an austerity agenda that guarantees massive unemployment and rising debts for as far as the eye can see. This is a critical election for all of Europe, and investors should pay careful attention to the results.
Closer to home, our firm will be kicking off a series of workshops in Winston-Salem NC designed around both Fiduciary (May 8) and Investor (May 22) education. Best practices for fiduciaries of retirement plans is a timely topic as the biggest changes in ERISA law since 1974 become operative in 2012. Investors focus too much on return, and not enough on risk management, so we will be reviewing basic statistical tools and methods for measuring both risk and return potential in a security or portfolio. There will be other workshops throughout the year; you can visit our website at www.stratfordadvisors.com to learn more.
Thanks for reading our Journal and have a great month.
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