A Diamond In A Rough Decade

4Q 2009

When fear ran rampant last March, it was easy to expect the worst. Media outlets were touting the probability of the Great Depression II, and the gut-wrenching free fall in asset values was virtually unrelenting. Very few were predicting that global equity markets would prove capable of climbing 70% or more off those lows in relatively short order. But, that’s exactly what happened, and investors that kept the faith can likely record 2009 as one of their best performing years ever.

As we break down the specifics, it’s important to again note the distribution of performance outcomes among the various asset classes represented. These relative zigs and zags are the crux of portfolio diversification, and we’re pleased to report that correlations are declining from the troublesome peaks of 2008. For the year, domestic equities returned between 19.7% (Large Value) and 46.3% (Mid Cap Growth). Gains within the international stock categories were enhanced by a generally declining U.S. Dollar, and ranged from 32.5% (Large Cap Developed) to an astounding 79.0% (Emerging Markets). Interestingly, components in the Fixed Income arena provided anywhere from -3.6% (U.S. Treasuries) to 58.2% (High Yield).

Despite last year’s impressive results, it’s a fact that the past decade remains the worst in at least a century of stock market history. Focusing solely on the -0.9% annualized return for the S&P 500, there’s been much lamenting over the “lost decade” for investors. We would circle back to our diversification discussion to disarm such claims. Given that 13 of the 17 category benchmarks we utilize in client portfolios posted positive returns in excess of inflation, the ability to deliver performance was clearly not eliminated. In fact, a hypothetical portfolio consisting of 60% global equities, 30% bonds, and 10% alternatives, would have returned 4.7% per year during the past decade. While this is a far cry from the extraordinary returns of the 1990’s, or the near record returns of the 1980’s, we believe the implied deterioration in lifestyle is overstated for those with diversified portfolios.

So what can we expect from this decade, still in its infancy? Most assuredly there will be difficulties that spook the market and cause corrections or even another potential bear market. Several issues come to mind: high unemployment, uncertain economic growth, potential disruptions from removing fiscal and monetary stimulus, ballooning budget deficits, inflation or interest rate spikes, increased regulation of business, prospects for higher taxes, further terrorist acts, etc… All of that said, the stock market can be viewed as a canvas on which people color their opinion. It would only be rational to assume some of these considerations are already included in current pricing levels. Thankfully, we begin this decade with price-to-earnings multiples roughly half the Y2K entry point. There is also $9.6 Trillion of cash sitting idle in money markets, CDs, or savings accounts that continue to yield essentially 0%. As forthcoming data allows investors to become increasingly comfortable with the durability of the recent rally, these reserves could be the slow- release Tylenol ® the market needs to continue its ascent.

As we look forward to the challenges and opportunities awaiting us, we would like to offer our warm thanks for the trust you have shown in Brand AMG through a difficult and volatile period. Your continued confidence in our wealth management capabilities is deeply gratifying. Our team is committed to retaining your trust and confidence in the coming year and beyond.