Reasons For Optimism

With 2011 now pretty much history, was there much to be happy about in 2011 from an investment perspective? Actually, despite all the turbulence, there were some reasons. While U.S. stocks went sideways (with a healthy dose of roller coaster volatility), on a relative basis sideways will have been pretty darn good performance when compared to most international markets, which are on track to decline anywhere from 10-30% this year. Bonds actually did a lot better than we thought in 2011, particularly U.S. Treasuries which benefitted from the “safe haven” status of the U.S. markets. But we have to wonder how much upside is left in bonds. We suspect much of that will depend on how things play out in Europe in the new year: if things deteriorate in Europe, the “flight to quality” into U.S. Treasuries could continue. Gold worked in 2011, but with prospects for a strengthening dollar and continued low inflation, our concern is gold may have reached an interim peak.

One important bright spot for the U.S. economy has been the strength of U.S. corporate earnings, which are on track to grow by an estimated 15% this year. Corporate profit margins and cash flows are at record highs and, barring some unforeseen disaster, we expect large U.S. companies will again generate healthy earnings and cash flow growth in 2012. We continue to see significant value in the earnings and cash flows of large U.S. multi-national companies and their ability to create rising cash flow streams via dividend increases. This is a bright spot for the U.S. economy and is part of the reason why we are cautiously optimistic about the outlook for U.S. equities in 2012.

Another potential positive for the U.S. market in 2012 is the now universal view that growth in the U.S. in 2012 will remain sluggish, in the range of 1-2%. That is the consensus now. As we know, the consensus is often wrong. We think the potential for surprises for the U.S. economy is to the upside due to continued employment gains, rising consumer confidence, rising corporate earnings and cash flow, continued healthy levels of business capital investment, and continued strong entrepreneurial activity and business formation, particularly in the tech sector.

From a financial planning standpoint, the fact that the stock market was flat in 2011 should not cause alarm. From a longer perspective, the stock market does appear to be in a long-term uptrend that began in March 2009. Also, there were a number of sectors that had significant moves. Many clients who were properly diversified actually saw increases in their portfolios for the year.

Even if one is retiring now, a properly diversified portfolio will capture future market growth and investments don’t end the day you retire. The most important questions from an investment planning standpoint are: Is one adequately diversified and, thereby, properly positioned to capture growth across a range of sectors ? Is the portfolio structured optimally with respect to risk vs. return?

Despite having lost some of their luster in the past decade, publicly traded equities are still one of the best ways for most people to capture growth, so as planners, we spend time thinking about this stuff and why and where client capital should be deployed to best accomplish client plan objectives. So, despite how 2011 may have seemed like another “lost year”, there were some positives and we have to remember that equities are still considered important elements of a sound financial plan and diversified investment portfolio.