lane asset management stock market commentary for december 2012

7/30/2019 Lane Asset Management Stock Market Commentary for December 2012

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Economic and Market Recap

November was all about the election results

and the fiscal cliff. Interestingly, despite vola-

tility, November finished nearly flat for the

U.S. and emerging markets while Europe had a

strong recovery. The first week of December,

ending with a positive jobs report in the U.S.,

nevertheless did little for U.S. stocks.

Regarding the election results, the biggest im-

pact seemed on income-oriented sectors

(utilities, financials, and preferred and dividend

stock funds). The thought here was that the

likelihood of higher taxes on dividends would

depress their value to investors resulting in

higher yielding securities. It’s an open ques-

tion how long this “adjustment” will last as

some sectors recovered quickly (e.g., finan-

cials) and others have not (e.g. utilities). A

study by Wells Fargo, citing a study by the

Federal Reserve Board in 2005, found that the

long run impact of tax law changes was short-

lived.

A second impact of the election was reaction

to the expectation of higher taxes on long

term capital gains. There is good evidence

that selling pressure depressed prices, espe-

cially in the last few weeks. As can be seen in

the chart below, much of this selling seems to

have dissipated as investors found alternative

(often equivalent) investments.

Stock Market CommentaryDecember 9, 2012

Lane Asset Management

This is my favorite time

of the year, a time for

family, friends and great

food. It’s also a time for

me to be thankful —

thankful for the health

and happiness we enjoy.

I am also thankful for the

indulgence of my readers

who are kind enough to

read my Commentaries

and offer helpful sugges-

tions and their own in-

sights.

But, this is not a great

time for millions who are

un – or underemployed,

who are hungry, or who

are homeless (although

knowing a few people in

this situation, it’s amaz-

ing how well they keep

their spirits up).

So, this is a time to be

thankful, but it’s also a

time to do whatever we

can to share our good

fortune with those less

fortunate. Talk about

return on investment!

Happy holidays to all.

The third significant immediate impact of the elec-

tion has been concern over the fiscal cliff. Here,

too, I think the issue may have run its course as in-

vestors seem to expect a settlement to have little

impact on economic growth (which we can all hope

for). That’s my expectation, too, though I doubt

we’ve seen the end of volatility.

Investment Outlook

Last month I indicated that this may not be the

best time to take on significant investment risk and

I’m sticking to that story. I believe the structural

problems in the developed economies are far from

resolved and will take more time to work through

the system. However, that doesn’t mean I wouldavoid equities and it doesn’t mean that there won’t

be decent opportunities for gains in 2013 (more on

that in my annual Fearless Forecast next month).

As shown on the following pages, both large cap eq-

uities and investment grade corporate bonds have

been performing well since the depths of the fiscal

crisis. While I think gains will be more muted in

the near future, I’ve read well-regarded analysts

who believe next year could be as strong as this

year. Therefore, my recommendation at thispoint, with much depending on one’s risk toler-

ance, is to stay the course with high grade equities

and corporate bonds. There are a few other areas

to be opportunistic, like municipal bonds, and we’ll

discuss those in greater length next month.

The charts on this and the following pages use exchange-traded funds (ETFs) rather than market indexes since indexes cannot be invested in directly. The ETFs

are chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity . Prospectuses for these ETFs can

be found with an internet search on their symbol. Past performance is no guarantee of future results.



SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. Its prospectus can be found online. Past performance is no


Following a hiccup on the heel of the election, SPY has not only recovered to its pre-election level for the

time being, but it has turned the corner on important momentum indicators as shown in the bottom of the

chart. An optimistic technical view would note the similarity of the moving averages and momentum indica-

tors (in fact, the entire pattern over the last three months) to the pattern displayed last May, June and July

and conclude there is opportunity to the upside. If that’s all we had to go on, I would change my outlook to

being more optimistic. But there’s also the fundamental reality of intractable debt and employment issues in the U.S. and Europe. It also needs

to be noted that a wide swath of economic indicators are far from robust. While my preference for fiscal policy is for stimulus paid for through

revenue increases and elimination of outdated or inefficient current spending coupled with comprehensive tax reform in the U.S. (yes, I think

“entitlements” also need to be addressed, but that’s another story), I’m not confident the political dynamics will take us there anytime soon.

Therefore, I think the best course is to remain cautious overall and to balance equity exposure against tolerance for risk.

S&P 500



VEU is an exchange-traded fund designed to match the experience of the FTSE All-world (ex U.S.) Index. Its prospectus can be found online. Past performance is no guarantee of future

results.

Lane Asset Manageme nt

Defying every expectation, international equities have continued to climb, overcoming the negative mo-

mentum shown at the bottom of the chart. Where last month I attributed this more to selected coun-

tries in Asia, recently even certain countries in Europe are outperforming the broader international index

(like Germany and Belgium). At this point, based on the chart below, there is every good reason to go

“green light” on selected international stocks. On the other hand, the reason I remain cautious is that

parts of Europe (Spain, Italy and Portugal, for example) as well other parts of the world (Brazil, for exam-

ple) continue to show relative weakness compared to the broader index. Moreover, the continuing unemployment and sovereign debt issues in

Europe remain quite worrisome. Therefore, the overall message is that while the broad international index is attractive at this time, investors

may be better served focusing on individual country selection.

All-world (ex U.S.)



SPY, VEU, and LQD are exchange-traded funds designed to match the experience of the S&P 500, (with dividends), the FTSE All-world (ex US) index, and the iBoxx Investment Grade

Corporate Bond Index, respectively. Their prospectuses can be found online. Past performance is no guarantee of future results.


Asset allocation is the mechanism investors use to enhance gains and reduce volatility over the long term. Commonly, investors

choose an allocation that reflects their risk tolerance and reallocate at prescribed times, say, semi-annually, or when the actual per-

centage allocation deviates from the longer-term strategic plan. One useful tool I’ve found for establishing and revising asset allo-

cation comes from observing the relative performance of major asset sectors (and within sectors, as well). The charts below show

the relative performance of the S&P 500 (SPY) to an investment grade corporate bond index (LQD) on the left, and SPY to a Vanguard All-

world (ex U.S.) index fund (VEU) on the right.

As shown on the left below, U.S. equities are turning the corner on investment grade corporate bonds — an interesting outcome following the

election, anticipation of which was showing up in late October. Since the reversal is relatively recent, increasing equity exposure should be done

carefully and spread over time. On the right, international equities have continued their outperformance relative to U.S. equities. It’s hard to

tell if this is a technical recovery coming off the prior months of underperformance or an indication of fundamental strength (something I have

a hard time believing for Europe). While the trend is clearly favoring international, the strong negative reading on the momentum indicators at

the bottom suggest a nearing potential for reversal. Bottom line: given market uncertainty, a balanced approach may be best at this time.

Asset Allocation and Relative Performance



AGG is an exchange-traded fund (ETF) designed to match the experience of the Barclays Capital U.S. Aggregate Bond Index. LQD is an ETF designed to match the experience of the iBoxx

Investment Grade Corporate Bond Index. Prospectuses can be found online. Past performance is no guarantee of future results.


LQD represents the total return (capital gains and interest income) for investment grade corporate bonds; AGG

represents the total return of a composite of domestic government and investment grade corporate bonds and

similar instruments (think of it as LQD but with government bonds). The chart on the right shows the relative

performance of LQD to AGG which, except for brief periods, has been positive for most of the last two years, sup-

porting the thesis of investment grade corporate bonds over government bonds.

No change from last month: From a technical perspective, it’s hard not to like investment grade corporate bonds. Not only have the last two

years been extraordinary, but this performance goes back to the early 80’s when interest rates were at their highest. Yes, certainly a large part

of the past performance can be attributed to the decline in interest rates and this is a phenomenon with a limited future, we can all agree. But

with the index holding bonds of various durations, and with the Fed determined to hold short term rates near zero until mid-2015, the impact

of rising rates (if occurring slowly) is likely to be more muted than many people might expect. In March and August, I was concerned about the

extent to which LQD had gotten above its trend line which also showed up in the relative performance chart. In both cases, that problem was

subsequently corrected and performance is back on trend. The picture looks similar at the end of September and some deterioration should

not come as too much of a surprise. That said, investment grade corporate bonds continue to be attractive in an unsettled environment.

U.S. Aggregate and Corporate Bonds




The chart below shows the last 12-month performance of the indicated ETFs, the same ones that are on page 1. The performance speaks for it-

self, but a few observations may be useful:

Following the two-month slide leading up to the election, the S&P 500 (with dividends included seems to be recovering. I would l ike to see

this continue for at least another month before making a much large commitment to U.S. equities. Gold (GLD) slipped in October, seemed like it might be bouncing back, but has languished for the last six weeks. I still don’t see enough evi-

dence to make a major commitment to gold at this time.

Oil (DBO) continues to slip as the world’s economies slow down and are confronted with even slower growth prospects.

Both Europe (IEV) and Emerging Markets (EEM) have had parallel performance and both seem to be on the mend over the past several

months. Europe has shown surprising strength and is now at a 12-month high.

Investment grade corporate bonds continue their no-drama upward trend and are very close in performance to equities in the U.S. and

Europe for the year.

12-Month Performance



Edward Lane is a CERTIFIED FINANCIAL PLANNER™. Lane Asset Manage-

ment is a Registered Investment Advisor with the States of NY, CT and

NJ. Advisory services are only offered to clients or prospective clients

where Lane Asset Management and its representatives are properly li-

censed or exempted. No advice may be rendered by Lane Asset Man-

agement unless a client service agreement is in place.

Investing involves risk including loss of principal . Investing in interna-

tional and emerging markets may entail additional risks such as currency

fluctuation and political instability. Investing in small-cap stocks includes

specific risks such as greater volatility and potentially less liquidity.

Small-cap stocks may be subject to higher degree of risk than more es-

tablished companies’ securities. The illiquidity of the small-cap market

may adversely affect the value of these investments.

Investors should consider the investment objectives, risks, and charges

and expenses of mutual funds and exchange-traded funds carefully for a

full background on the possibility that a more suitable securities trans-

action may exist. The prospectus contains this and other information. A

prospectus for all funds is available from Lane Asset Management or

your financial advisor and should be read carefully before investing.

Note that indexes cannot be invested in directly and their performance

may or may not correspond to securities intended to represent these

sectors.

Investors should carefully review their financial situation, making sure

their cash flow needs for the next 3-5 years are secure with a margin

for error. Beyond that, the degree of risk taken in a portfolio should be

commensurate with one’s overall risk tolerance and financial objectives.

The charts and comments are only the author’s view of market activity

and aren’t recommendations to buy or sell any security. Market sectors


Disclosures

Periodically, I will prepare a Commentary focusing on a specific investment issue.

Please let me know if there is one of interest to you. As always, I appreciate your feed-

back and look forward to addressing any quest ions you may have. You can find me at :

www.LaneAssetManagement.com

[email protected]

Edward Lane, CFP®


Stone Ridge, NY

Reprints and quotations are encouraged with attribution.

and related exchanged-traded and closed-end funds are selected based on his opinion

as to their usefulness in providing the viewer a comprehensive summary of market

conditions for the featured period. Chart annotations aren’t predictive of any future

market action rather they only demonstrate the author’s opinion as to a range of pos-

sibilities going forward. All material presented herein is believed to be reliable but its

accuracy cannot be guaranteed. The information contained herein (including historical

prices or values) has been obtained from sources that Lane Asset Management (LAM)considers to be reliable; however, LAM makes no representation as to, or accepts any

responsibility or liability for, the accuracy or completeness of the information con-

tained herein or any decision made or action taken by you or any third party in reli-

ance upon the data. Some results are derived using historical estimations from available

data. Investment recommendations may change without notice and readers are urged

to check with tax advisors before making any investment decisions. Opinions ex-

pressed in these reports may change without prior notice. This memorandum is based

on information available to the public. No representation is made that it is accurate or

complete. This memorandum is not an offer to buy or sell or a solicitation of an offer

to buy or sell the securities mentioned. The investments discussed or recommended in

this report may be unsuitable for investors depending on their specific investment ob-

jectives and financial position. The price or value of the investments to which this re-

port relates, either directly or indirectly, may fall or rise against the interest of inves-

tors. All prices and yields contained in this report are subject to change without notice.

This information is intended for illustrative purposes only. PAST PERFORMANCE

DOES NOT GUARANTEE FUTURE RESULTS.

http://www.lanefinancialmanagement.com/


mailto:[email protected]




lane asset management stock market commentary for december 2012

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