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Market Perspective for 1/16/12

The fiscal cliff deal reached on New Years’ Eve helped stocks extend the rally that began on November 16th.   U.S. stocks have regained all of the +7.5% they dropped after Sept 14th, and now sit at levels not seen since December 2007.<1> International markets were much more impressive, especially to dollar-based investors.  Their Autumn swoon was only -6%, and they have since rallied more than +12.5%.<2> The belief that the world’s central banks are all using asset prices as indicators of the success of their economic stimulus plans is the intellectual cornerstone of the current rally.  While we don’t know the ultimate effect of the global easing monetary policy, it is safe to say it is lifting prices in the near term. Making market predictions is always difficult, which is why smart people avoid it.  I look pretty good with regard to my comment that markets tend to be seasonally strong from November 17th to the end of the year, and that the seven week sell-off which began in late September was not the start of something much bigger.<3> On the other hand, I predicted that the out-performance of Europe versus the U.S. over the previous few months was an oversold bounce and wouldn’t last.<4> Of course, it has only intensified because there is now some reason to believe that austerity is working.  Greece and Spain receive a lot of headlines for their demonstrations, but in other places (Ireland and Portugal) the government has made some hard decisions and they appear to be working.  Deficits in those countries are coming down,  and both countries are seeing foreign companies looking to move production there. Currently, market bulls are arguing:

  1. There is a lot of stimulus scheduled in 2013.  Especially from Japan.

  2. The world is more resilient than is often feared.  Sticky situations more often than not do not devolve into chaos and blood in the streets.

  3. Commodity prices are in check

  4. The U.S. is becoming increasingly energy self-sufficient

  5. The Fed is targeting stock prices.  They will do what they can to prevent/ameliorate a market decline before it becomes significant (greater than -20%).

  6. The options market is not pricing in a large volatility increase for 2013.  As early as the summer of 2007 it began to signal higher 2008 volatility.<5>

  7. Finally, stocks as an asset class have increased momentum versus bonds. And market bears are arguing:

  8. High relative valuations (lower growth rates SHOULD merit lower P/E ratios).  I believe the argument that low interest rates merit high P/E ratios is hogwash.

  9. European risk is underpriced.  Are Euro bears like the boy who cried wolf?

  10. Strategists are (too) bullish.  (Sentiment is a contrary indicator)

  11. 3rd quarter earnings were weak, 4th quarter may continue that trend

  12. VIX is an absurdly low 13.5.  Perhaps investors too complacent.

  13. Increased taxes will be a headwind for 2013 growth economic growth.  Estimates are for an approximately 1.3% reduction in GDP during the first half of the year.<6> For my part I would note that the “trend is your friend.”  While I am sympathetic to many of the bear arguments, calling a market top is exceedingly difficult.  Fighting the Fed is a low probability endeavor.  Be careful, and don’t be surprised if we see a little (-3% to -6%) pullback here.  That said, it is very impressive how stocks have shrugged off debt ceiling concerns and the alarmingly poor performance of Apple Inc.  AAPL is off -30% from its all-time high and is also solely responsible for the outperformance of value stocks over growth stocks since September 30.

Past performance is no assurance of future results.  Trademark Financial Management, LLC (“Trademark”) is a registered investment adviser with its principal place of business in the State of Minnesota.  Trademark and its representatives are in compliance with registration requirements imposed upon investment advisers by those states in which Trademark operates. Trademark may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration.  This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. Any subsequent, direct communication by Trademark with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Trademark please contact Trademark at (952) 358-3395 or refer to the Investment Adviser Public Disclosure web site ( For additional information about Trademark, including fees and services, send for our disclosure statement as set forth on Form ADV from us using the contact information herein or by calling 952-358-3395.  Please read the disclosure statement carefully before you invest or send money.

<1> Source: Telemet Orion, S&P 500

<2> Source: Telemet Orion, MSCI EAFE

<3> See “Market Perspective for 11/26/12” at

<4> See “Market Perspective for 11/26/12” at

<5> As measured by the CBOE Volatility Index

<6> Goldman Sachs, US Daily: The Consumption Hit From Higher Taxes (Stehn), January 10, 2013.

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