2012 Review

To say the least, 2012 was a good year for equity markets.  Global equity indexes while volatile produced solid double-digit gains, with international and emerging markets outperforming the US indexes.  Despite their low yields, bonds managed to post mid single digit returns.   Only commodities were down on the year, as demand growth was subdued along with economic growth. 

Source: JPMorgan Funds

From a longer perspective, with the 2000-2002 bear market out of the way, it is nice to see high single digit annualized returns for the developed markets over the last ten years.  There was much rejoicing in the marketing departments throughout Wall Street.  The Emerging markets posted a very impressive 16.9% annualized return.  Given their fiscal situation and demographics, they can probably keep growing nicely for a while yet.

Going in reverse order, I would like to briefly discuss some of the major themes of last year.  I have chosen an image that I thought best sums each on eup, so without further ado…

The third most important chart is the HSBC China Manufacturing PMI.  The Chinese authorities spent much of 2012 recalibrating their economy to a slower growth, consumer led one, putting manufacturing and commodities on hold.  With no massive infrastructure led boom from China to offset European weakness, Asian markets languished for the first half of the year.  The turnaround in Europe began the push higher and the rise in the HSBC China Manufacturing PMI solidified it.

Source: Markit

The second most important image of 2012 is below and explains so much of what happened in the United States last year.  The seemingly never-ending election did end but nothing changed.  President Obama won a second term, Democrats retained control of the Senate and Republicans retained control of the House of Representatives.  The two parties remain further apart than ever and less able to come to an agreement.  With politics driving the economy more than ever in the United States, expect more volatility as we continue to lurch from self-imposed crisis to self-imposed crisis, over the debt ceiling, taxes and entitlements. 

Source: RealClearPolitics - Election 2012



 

Finally, the chart that I believe summarizes 2012 best is below.  Europe was the center of most investors’ universe.  With banking crisis following budget crisis the yields on Spanish and Italian bonds continued to rise as investors fled those markets.  By the summer, yields reached critical levels where Spain and Italy would no longer be able to service their debt if they remained there.  Then Super Mario (European Central Bank (ECB) President Mario Draghi) came riding to the rescue and stated that the ECB would do whatever it takes to keep the euro together.  With complete disaster off the table, markets rallied, hard.  The turnaround was so large was that after trading as high as 7.6% in late July 2012, yields on Spanish ten-year bonds dropped below 5% at the start of 2013.   

Source: Dr. Ed's Blog