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Despite heightened volatility, the S&P 500 index ended the year where it started, with its 2% return coming from dividends. Smaller and mid-cap stocks closed the year down 4.2% and 1.7%, respectively, despite also posting double-digit fourth-quarter gains. Fear over Europe and slowing growth in China dragged foreign stocks down 11.8%, with China concerns and a flight from risk hitting emerging-markets stocks even harder; they fell 18.8%.
High-quality bonds were on the other side of the volatility, with sharp flight-to-safety rallies that helped net the Barclays Aggregate Bond Index a 7.4% full-year gain. Our allocations to flexible bond and absolute-return-oriented fixed income funds hurt performance in our portfolios because they provided less of the short-term protection of high-quality long term bonds, but we remain confident in our belief that our bond allocations will provide better longer-term returns than the pure high-grade benchmark at still-acceptable risk levels. In addition, with the consensus forecasts among the 74 economists polled by Bloomberg at the beginning 2011 for the year-end closing yields of the 2-, 10-, and 30-year Treasuries of 1.10%, 3.75%, and 4.75%, respectively, we did not see a reason to extend duration and purchase long term Treasury bonds. The fact that the actual levels were 0.26%, 1.88%, and 2.90%, respectively, highlighted the under performance of some our active managers. In our opinion this shows the folly of short term forecasts, not a breakdown in logic. Over shorter periods in which investors’ decisions about getting in and out of stocks are driven by macro headlines (often referred to as “risk-on, risk-off”) there is less consideration for fundamentals of individual stocks and bonds. Our experience suggests this creates long-term opportunities, but this can be frustrating over shorter periods.
The roller coaster ride of the market against the backdrop of harsh global news coverage makes us happy to say “goodbye” to the third quarter of this year, which posted the worst third quarter S&P 500 loss since 2002. The S&P 500 was down 14.33% for the quarter and is down 8.68% for the year. Foreign stocks fared worse than the S&P 500 as the MSCI EAFE Index was down 14.98% for the quarter and 19.01% for the year. Even worse than the S&P 500 and the foreign market, the Russell 2000 Small Cap Index was down 21.9% and is down 17% for the year. Fixed income was the saving grace as the Barclays Aggregate Bond Index was up 3.82% for the quarter and is up 6.65% for the year. That being said, it is hard to get excited about the long term prospects of a ten year Treasury yielding less than 2%. From a safety and total return standpoint the Treasury trade has worked out over the short term but we are frankly confused by the attraction of an investment that ties up capital at 2% for the next ten years and this is part of the reason we continue to drift towards equities (many with debt levels at 20 year lows and substantial cash flow to boot).
The risk we alluded to in previous letters hit a tipping point in the second quarter as volatility returned to the market. The headlines were dominated by the fear of a Greek default on their outstanding debt, wildly fluctuating oil prices, death of Osama bin Laden, and the on-going political battle over the US debt ceiling. Of course, a late month rebound helped boost the market as it became increasing likely that the EU and IMF would manage to kick Greece’s debt “can” down the road at least one more time. When the dust settled, stocks wound up roughly flat for the quarter. The large cap S&P 500 Index was up 6% for the year. The small-cap Russell 2000 was down 1.6% for the quarter but still up 6.2% for the year. The MSCI World ex-USA was up 1.1% for the quarter and rests at positive 5.1% for the year, in spite of the European contagion fears. Fixed income provided a calmer ride as the Barclays Aggregate Bond Index was up 2.37% for the quarter leaving it with a year-to-date gain of 2.36%.
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Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank. You can obtain more information about Synovus Securities, Inc. and its Registered Representatives by accessing BrokerCheck