Judging by the headlines in the financial press, investors spent much of the past year anxiously awaiting one calamity after another that failed to occur. The plunge off the so-called fiscal cliff was averted. The euro zone did not fall apart. China’s economy and stock market did not crash. The bond market did not implode. The re-election of President Barack Obama did not derail the US market. The “flash glitch” in early August did not lead to further trading disruptions. Doomsday did not arrive on December 21, as some interpreters of the Mayan calendar suggested it would.
Instead, the belief that owning a share of the world’s businesses is a sensible idea appears to be alive and well, despite suggestions from some observers that the “cult of equity” is dead. For the year, index returns were as follows:
2012 Index Returns (Canadian Dollars)
|Cash||Canada One-Month T-Bills||0.91%|
|Canadian Bonds||DEX Universe Bonds||3.60%|
|Canadian Stocks||S&P/TSX Composite||7.19%|
|US Stocks||S&P 500||13.04%|
|International Stocks||MSCI EAFE plus Emerging Markets||15.06%|
Source: Dimensional Fund Advisors, iShares. Lowrie Financial
Although much of the financial news over the past year highlighted Europe’s fragile financial health, most of the region’s equity markets outperformed the US and Canada, including Austria, Belgium, Denmark, France, Germany, the Netherlands, Sweden, and Switzerland.
It took nearly 4½ years, but the cumulative wealth of an S&P 500 strategy with dividends reinvested finally reached an all-time record (measured on a month-end basis) in March 2012, and finished the year 3.3% above the previous high-water mark set in October 2007.
The table below shows how many years were required to achieve a new high in terminal wealth during some of the major market cycles in the past. Although many investors have expressed frustration with stock market fluctuations in recent years, the time
required to recover losses from the peak in October 2007 appears broadly consistent with past cycles. We can draw some measure of solace in acknowledging that past generations of investors often found their patience sorely tested, as well.
Market Cycles Based on Month-End Value of S&P 500 Index with Reinvested Dividends
|Peak Month||Trough Month||Loss at Trough||Recovery Month||Years
|Oct 2007||Feb 2009||–50.9%||Mar 2012||4.4|
|Mar 2000||Sep 2002||–43.8%||Oct 2006||6.6|
|Aug 1987||Nov 1987||–29.5%||May 1989||1.8|
|Dec 1972||Dec 1974||–37.2%||Jun 1976||3.5|
|Dec 1961||Jun 1962||–22.3%||Apr 1963||1.3|
|Feb 1937||Mar 1938||–50.0%||Mar 1944||7.1|
|Aug 1929||Jun 1932||–83.4%||Jan 1945||15.4|
Source: Dimensional Fund Advisors
Every year brings its share of surprises. Perhaps the biggest surprise of 2012 was the strength in stock and bond prices around the world despite a steady stream of discouraging news events.
At Polaris we constantly remind investors to ignore the news and predictions about the future. Here are a few examples from 2012: John Paulson, who manages $19 billion US, predicted the Euro would collapse; Morgan Stanley predicted the S&P500 Index would lose 7%; Credit Suisse predicted wide swings in equity prices for the year; and, Citigroup Inc. predicted a 90% possibility that Greece would leave the euro by January 1, 2013. All of these proved to be incorrect.
What’s in store of 2013? No one really knows and it doesn’t really matter. The sun will rise tomorrow and people will continue going about their business. Owning a share of the world’s businesses continues to be a sensible idea. Investors with a properly balanced, globally diversified portfolio can tune out the media and rest easy.