Siegel/Yocum Asset Management, LLC
Commentary – 2nd Quarter 2012
Consistent with the spring/summer months of the last couple of years, the U.S. economy
has begun to slow. Key measures such as employment, manufacturing, and GDP have
weakened to the point where the Fed is contemplating another round of stimulus. Since the
2008 credit crisis, our economy and capital markets have been propped up by artificial
means. It appears that real organic growth without the help of an easy monetary policy
eludes our economy. Growth (GDP) should be in the 4-5% range at this stage of a typical
recovery. The latest reading was 1.9%; far from a recession, but less than ideal.
Here are the major issues that stand in the way of economic improvement and a strong
The looming “fiscal cliff” (higher tax rates and automatic spending cuts)
European debt issues
Weakening economic data in the U.S., China, Europe
On the positive side:
Broad pessimism (good for stocks)
Policy opportunity (tax reform)
Drop in energy prices
Stabilizing housing market
Historically low interest rates
From a strategy standpoint, we are erring on the side of caution in the equity market and
have taken a slightly more aggressive position in the bond market.
SPX = U.S. Large Caps, AGG = U.S. Bonds, VEU = International Stocks, GLD = Gold
It was a negative quarter for equity markets worldwide based on weaker economic metrics
and headline risks. As we predicted, the U.S. stock market returned a portion of the first
quarter’s gains. However, it is important to note that despite the cloud of uncertainty and
pessimism, the S&P 500 has logged an impressive return on a year to date basis.
Going forward, we expect elevated volatility based on news from Europe and political issues
domestically. For the remainder of 2012, the path for stocks will be determined by whether
or not the Fed implements another round of stimulus, the outcome of our Presidential
election, and corporate earnings. It is our contention that stock prices already reflect much
of the current economic and political environment. With the absence of a financial shock,
stocks have the opportunity to greatly appreciate based on attractive valuations, low interest
rates, and lower energy prices.
SPX = U.S. Large Caps VEU = International Stocks
Currently our client portfolios are over-weighted in U.S. large cap stocks and equity
investments with lower than average risk exposure. As previously communicated, we plan to
add to equities on further price weakness in order to take advantage of what we would
consider a very attractive medium-long term buying opportunity.
Fixed Income Overview:
The U.S. bond market has continued to get more expensive as the benchmark 10-year
Treasury yield reached all time low territory this quarter. With stocks out of favor and cash
yielding next to nothing, both U.S. and foreign investors have continued to pour money into
Treasury bonds as a safe haven. This immense buying pressure has continued to force
prices up and yields down. Over the last decade, yields have experienced a precipitous
decline from 6.5% to 1.5%.
The prospective returns for high quality government bonds going forward is dismal. Even if
rates stay at these historically low levels, investors will be settling for returns that are less
than the inflation rate. If rates begin to rise, which is inevitable over the long run, these
inflated bond prices will lose value. We look at this conundrum as a double-edged sword. It
is our contention that in order to achieve acceptable returns in the fixed income market over
the next several years, investors will need to have exposure to corporate bonds, municipals,
and foreign debt of average credit quality.
We recently had the opportunity to meet with Dan Fuss, famed fixed income fund manager
with Loomis Sayles. He stated that “we are in the foothills of a twenty year period of rising
interest rates.” Our role as risk managers is to invest client portfolios in the bond market for
diversification and income, while avoiding significant erosion of principal.
We will contact you shortly to schedule a review of your portfolio. Thank you.