The more things change the more the stay the same
Ah, is it just me or does anybody see
The new improved tomorrow isn't what it used to be
Yesterday keeps comin' round, it's just reality
It's the same damn song with a different melody
The market keeps on crashin'
If you weren't paying attention you'd say 2011 was a pretty uneventful year in the markets. The S&P 500 started the year at 1257.64, and finished the year at 1257.60, the smallest annual change ever. For those of you who were paying attention, you are well aware that 2011 was a hell of a ride. In fact, it was the 17th most volatile year in history (at least since 1928). Sort of like getting on a roller coaster, screaming wildly as you are thrown upward and downward at dizzying speeds, only to get off at exactly the same spot you got on. The following table highlights the magnitude of 2011's volatility:
All eleven years from 1929 to 1939 are in the top 16, as well as 1987, 2000, 2002, 2008, and 2009. 2011 comes in at number 17.
The following graph is our depiction of Risk-On and Risk-Off. The horizontal axis is the securities correlation to the S&P 500, a correlation of 1.00 means the security moves in tandem with the S&P 500. A negative correlation means the security moves in the opposite direction as the S&P 500. The vertical axis shows each securities total return for the year 2011. In our portfolio the best performing asset was US TIPS, up 13.28%. The worst performing asset was Emerging Market Equities, down 18.73%. The size of each bubble reflects our year-end allocation to each security. Obviously we ended the year in a fairly defensive position with 33.5% in cash.
The following table is sorted by correlation to the S&P 500, with the Vanguard Total Stock Market ETF (VTI) at a perfect 1.00 correlation.
Some interesting observations:
While quite a few assets had correlations greater than 0.80 (pretty correlated to S&P 500), their performance was very divergent. Equity commodities and international equities did horribly, while higher yielding securities like REITs, High Yield Bonds, and energy MLPs, did relatively well.
More defensive securities like gold and fixed income did relatively well.
Huge divergence in performance between the yellow metal Gold (GLD up 9.57%) and Gold Mining stocks (GDX down -16.09%)!
Thoughts on 2012:
As I said in my last email, I'm not in the prediction game, I'm in the observation game. Here are my big observations as we head into 2012:
The US and most of the developed world spent 60 years leveraging up, and promising more than they could deliver.
We have hit a tipping point and a massive global de-leveraging is upon us. This will take years, maybe decades, as we go through fits and starts.
The most likely outcome is very moderate economic growth, and very low interest rates. Savers will continue to be penalized in favor of debtors. (Remember the government is the biggest debtor).
Currencies will be devalued as a way of devaluing sovereign debt loads.
Political manipulation of the markets will remain at high levels as governments continue to renege on their promises.
Volatility should remain at relatively high levels.
We will remain defensive, diversified, and willing to reallocate assets to securities/assets that can rally. I'm not bearish, I'm not bullish, I'm agnostic. I'll take what the market gods give us, and step to the side when they give us nothing. The more things change the more they stay the same.