Download “Risk-On” Sentiment Leads to Rally in 4th Quarter

March 2012
3930 Edison Lakes Parkway
Suite 250
Mishawaka, IN 46545
ITC Advisor
“Over 20 Years of Excellence in Wealth Management”
“Risk-On” Sentiment Leads to Rally in 4th Quarter
In 2011, equity markets digested headlines ranging from the extremely negative (earthquake
in Japan, US debt downgrade, Euro instability) to the rather positive (brightening US economic outlook, corporate earnings strength). This “tug of war” effect of the news cycle created a volatile market environment. In the last quarter of 2011, optimism about a Euro bailout
and good projected US retail sales helped boost US equity returns for the year.
Founded in 1988, Indiana
Trust and Investment Management
Company is an
independent trust company
chartered under the Indiana
banking statutes. It is a single purpose financial institution dedicated exclusively
to providing investment management and trust services to
individuals, trusts, employee
benefit plans, corporations,
and not-for-profit organizations
Returns: 4th Quarter 2011 and Full Year 2011
ASSET CLASS
4Q 2011
2011
Equities
Large Cap US Equities (S&P 500)
11.8%
2.1%
Mid/Small Cap US Equities (Russell 2000)
15.5%
-4.2%
International Developed Market Equities (MSCI EAFE)
3.3%
-12.1%
Emerging Market Equities (MSCI Emerging Markets)
4.4%
-18.4%
Barclays Capital US Aggregate Bond Index
1.1%
7.8%
BofA Merrill Lynch Municipals, 3-7 yr
1.4%
6.9%
15.2%
8.3%
Fixed Income
Alternatives
Real Estate (FTSE NAREIT Equity REITS)
Please join us for the next
Quarterly Investment
Briefing:
Phone: 574-271-0374
Fax: 574-271-0378
The ITC Advisor is published four times a year. All articles contained herein are
solely for general information purposes, and are not to be construed as legal,
accounting, or other professional advice. The authors and publisher, accordingly, assume no liability whatsoever in connection with the use of this material. Every effort has been made to ensure this material is correct at the time
of publication.
Wednesday,
May 2, 2012
8:00 a.m. to 9:00 a.m.
Windsor Park
Conference Center
4020 Edison Lakes
Parkway
Mishawaka, IN 46545
In 2011, investors gravitated to incomegenerating US stocks (such as utilities) and
steady, defensive sector stocks (such as
healthcare and consumer staples). On the
flip-side, concern over Euro debt exposure
and regulatory uncertainty led to large declines in financial stocks. The net effect was
a +2.1% return on Large Cap US stocks for
the year. Mid/Small Cap US equities rallied
strongly in the 4th quarter (+15.5%), but it
was not enough to erase downturns driven
by market volatility earlier in the year and
they ended down -4.2% at year end.
International developed market stocks did
not rally as strongly as US markets in the 4th
quarter as investors remained concerned
about a recession beginning in Europe and a
slower growth outlook for that region. This
kept a lid on international stock returns, and
it created a “flight to safety” push into US
dollar-based assets. One result of this was a
stronger US dollar, which dampened international stock returns for the year.
The stronger dollar also helps explain part
of the 2011 Emerging Markets return: stripping out the currency impact on returns,
Emerging Markets were down -12.5%, a
result very close to the local currency returns in international developed markets.
Continued on Page 2
(Continued from page 1)
Other factors contributed to the downturn in Emerging Markets in 2011. Many countries tightened
monetary policy by raising interest rates in an effort
to combat inflation. Also, broad declines in materials
related commodities (copper and aluminum) hurt
materials-intensive countries in the Emerging Markets index.
US fixed income returns were quite strong in 2011.
Bonds benefitted from the “flight to safety” – the US
Aggregate Bond Index was up +1.1% for the quarter
and +7.8% for the year. Municipal Bonds were stellar performers in the 4th quarter (+1.4%) and for the
year (+6.9%). This is notable as certain well-known
pundits had predicted doom in the form of widespread municipal debt defaults in 2011.
To kick off 2012, US equity asset classes continued
their strong run that started in the 4th quarter 2011 –
US Large Caps were up 4.5% for the month of
January. International equities, bolstered by Eurozone negotiations and monetary easing in countries
such as China and Brazil, also have had a strong start
to the year. Developed Market equities were up
5.3% and Emerging Market equities were up 11.3%
for the month.
The Price of Safety
The major theme of 2011 was sentiment-driven equity market volatility and the resultant investor
“flight to safety”. Bearish on Eurozone growth prospects and worried about financial sector exposure to
potential sovereign debt defaults, investors have
flocked to US dollar-based “safe” assets. These perceived safe assets typically include cash, gold, and –
overwhelmingly – US Treasury Bonds.
US interest rates fell dramatically in 2011. The
benchmark 10-year US Treasury Bond yield fell
from 3.8% in February to 1.8% by the end of the
year, a level well below historical norms. One reason
interest rates are so low is Federal Reserve interest
rate policy. Another reason rates are low is the
strong demand for safety that many investors have
continued to exhibit. Investors have searched near
and far for safe yield and US Treasuries, as the largest and deepest sovereign debt market in the world,
are usually the first stop on that search.
One consequence of the flight to safety was that
other fixed income sectors, such as municipal and
corporate bonds, became more attractive when measured against US Treasuries. Tax-Exempt Municipal
Bonds, across all maturities, offered superior pre tax
yields to their Treasury counterparts. As Municipal
Bonds are generally high-quality instruments, they
too benefitted from the flight to safety in 2011 (as
reflected in their return, detailed above). Investment
grade Corporate Bonds saw a similar experience in
2011.
Another consequence of the “bidding up” of safe
assets is that US equity valuations look very attractive relative to bonds. At the end of 2011, the
“earnings yield” of S&P 500 stocks (which is company’s earnings divided by stock price) was almost
6% higher than the yield on the 10-year Treasury
Bond. By this measure, stocks look attractive relative to bonds to a degree not seen since the early
1970’s. Stocks also look attractive relative to bonds
when comparing the dividend yield of the S&P 500
(2.1%) to the 10-year Treasury yield (1.9%).
Potentially more attractive from a valuation perspective are International Developed Market and Emerging Market equities. In 2011, markets priced in significant profit deterioration for companies comprising these asset classes. As a result, valuations of
these asset classes have come down relative to their
historical norms and relative to US equities.
Furthermore, international equity asset classes represent more than half of all global equity market value
and have provided meaningful diversification benefits to portfolios over time. When combined with
their attractive valuations, these are strong reasons to
remain invested in international equities.
Portfolio Comments
As outlined above, US Treasury yields have dropped
significantly as “safe” assets became more expensive
in 2011. While US government and agency bonds
remain a major piece of our core fixed income portfolios, we continue to diversify amongst bond sectors and to look for sectors with relatively attractive
long-term valuations. Over the course of 2011 and
early 2012, we have increased our allocation to investment grade corporate bonds and established po-
sitions in investment grade international bonds. Taxable municipal bonds and Inflation-Protected Treasuries, sectors we began adding to portfolios a few
years ago, continue to play important roles in many
fixed income portfolios. Consistent with our overall
theme of diversification, we will also continue to
build out the alternatives component of the portfolios
over the course of 2012.
WELCOME DAVID KIBBE
David joined Indiana
Trust in November
2011 as a Vice President in the personal
trust area. He comes to
Indiana Trust with over
20 years of experience
concentrated in estate
planning and trust administration. He was
most recently a Vice
President & Trust Officer with First Source Bank
and prior to that was in private practice. As an attorney with the South Bend office of Barnes & Thornburg LLP, he was responsible for developing and
implementing estate plans, as well as handling probate administration and related litigation.
David earned a Bachelor of Arts Degree from Hillsdale College in Hillsdale, Michigan, as well as a
Juris Doctorate Degree from Washington University
in St. Louis, Missouri.
He has been active in numerous community based
civic and business organizations. David currently
serves as President of the Boards of Hope Ministries
and IUSB Arts Foundation, and is a member of the
REAL Services Guardianship Advisory Council. He
is a past-President of the Michiana Estate Planning
Council. He has also been active in his church, St.
Joseph Parish in South Bend.
David and his wife Bridget have five children, ages
17-27. Sean is a graduate of Purdue, Patrick graduated from Notre Dame, Meghan is a senior at Saint
Mary’s College, Mary Kate is a Hillsdale College
freshman, and Colin is a junior at Marian High
School. David enjoys family game nights, Notre
Dame sports (especially football!), traveling, cooking and playing with his three dogs.
(Continued from page 1)
Other factors contributed to the downturn in Emerging Markets in 2011. Many countries tightened
monetary policy by raising interest rates in an effort
to combat inflation. Also, broad declines in materials
related commodities (copper and aluminum) hurt
materials-intensive countries in the Emerging Markets index.
US fixed income returns were quite strong in 2011.
Bonds benefitted from the “flight to safety” – the US
Aggregate Bond Index was up +1.1% for the quarter
and +7.8% for the year. Municipal Bonds were stellar performers in the 4th quarter (+1.4%) and for the
year (+6.9%). This is notable as certain well-known
pundits had predicted doom in the form of widespread municipal debt defaults in 2011.
To kick off 2012, US equity asset classes continued
their strong run that started in the 4th quarter 2011 –
US Large Caps were up 4.5% for the month of
January. International equities, bolstered by Eurozone negotiations and monetary easing in countries
such as China and Brazil, also have had a strong start
to the year. Developed Market equities were up
5.3% and Emerging Market equities were up 11.3%
for the month.
The Price of Safety
The major theme of 2011 was sentiment-driven equity market volatility and the resultant investor
“flight to safety”. Bearish on Eurozone growth prospects and worried about financial sector exposure to
potential sovereign debt defaults, investors have
flocked to US dollar-based “safe” assets. These perceived safe assets typically include cash, gold, and –
overwhelmingly – US Treasury Bonds.
US interest rates fell dramatically in 2011. The
benchmark 10-year US Treasury Bond yield fell
from 3.8% in February to 1.8% by the end of the
year, a level well below historical norms. One reason
interest rates are so low is Federal Reserve interest
rate policy. Another reason rates are low is the
strong demand for safety that many investors have
continued to exhibit. Investors have searched near
and far for safe yield and US Treasuries, as the largest and deepest sovereign debt market in the world,
are usually the first stop on that search.
One consequence of the flight to safety was that
other fixed income sectors, such as municipal and
corporate bonds, became more attractive when measured against US Treasuries. Tax-Exempt Municipal
Bonds, across all maturities, offered superior pre tax
yields to their Treasury counterparts. As Municipal
Bonds are generally high-quality instruments, they
too benefitted from the flight to safety in 2011 (as
reflected in their return, detailed above). Investment
grade Corporate Bonds saw a similar experience in
2011.
Another consequence of the “bidding up” of safe
assets is that US equity valuations look very attractive relative to bonds. At the end of 2011, the
“earnings yield” of S&P 500 stocks (which is company’s earnings divided by stock price) was almost
6% higher than the yield on the 10-year Treasury
Bond. By this measure, stocks look attractive relative to bonds to a degree not seen since the early
1970’s. Stocks also look attractive relative to bonds
when comparing the dividend yield of the S&P 500
(2.1%) to the 10-year Treasury yield (1.9%).
Potentially more attractive from a valuation perspective are International Developed Market and Emerging Market equities. In 2011, markets priced in significant profit deterioration for companies comprising these asset classes. As a result, valuations of
these asset classes have come down relative to their
historical norms and relative to US equities.
Furthermore, international equity asset classes represent more than half of all global equity market value
and have provided meaningful diversification benefits to portfolios over time. When combined with
their attractive valuations, these are strong reasons to
remain invested in international equities.
Portfolio Comments
As outlined above, US Treasury yields have dropped
significantly as “safe” assets became more expensive
in 2011. While US government and agency bonds
remain a major piece of our core fixed income portfolios, we continue to diversify amongst bond sectors and to look for sectors with relatively attractive
long-term valuations. Over the course of 2011 and
early 2012, we have increased our allocation to investment grade corporate bonds and established po-
sitions in investment grade international bonds. Taxable municipal bonds and Inflation-Protected Treasuries, sectors we began adding to portfolios a few
years ago, continue to play important roles in many
fixed income portfolios. Consistent with our overall
theme of diversification, we will also continue to
build out the alternatives component of the portfolios
over the course of 2012.
WELCOME DAVID KIBBE
David joined Indiana
Trust in November
2011 as a Vice President in the personal
trust area. He comes to
Indiana Trust with over
20 years of experience
concentrated in estate
planning and trust administration. He was
most recently a Vice
President & Trust Officer with First Source Bank
and prior to that was in private practice. As an attorney with the South Bend office of Barnes & Thornburg LLP, he was responsible for developing and
implementing estate plans, as well as handling probate administration and related litigation.
David earned a Bachelor of Arts Degree from Hillsdale College in Hillsdale, Michigan, as well as a
Juris Doctorate Degree from Washington University
in St. Louis, Missouri.
He has been active in numerous community based
civic and business organizations. David currently
serves as President of the Boards of Hope Ministries
and IUSB Arts Foundation, and is a member of the
REAL Services Guardianship Advisory Council. He
is a past-President of the Michiana Estate Planning
Council. He has also been active in his church, St.
Joseph Parish in South Bend.
David and his wife Bridget have five children, ages
17-27. Sean is a graduate of Purdue, Patrick graduated from Notre Dame, Meghan is a senior at Saint
Mary’s College, Mary Kate is a Hillsdale College
freshman, and Colin is a junior at Marian High
School. David enjoys family game nights, Notre
Dame sports (especially football!), traveling, cooking and playing with his three dogs.
March 2012
3930 Edison Lakes Parkway
Suite 250
Mishawaka, IN 46545
ITC Advisor
“Over 20 Years of Excellence in Wealth Management”
“Risk-On” Sentiment Leads to Rally in 4th Quarter
In 2011, equity markets digested headlines ranging from the extremely negative (earthquake
in Japan, US debt downgrade, Euro instability) to the rather positive (brightening US economic outlook, corporate earnings strength). This “tug of war” effect of the news cycle created a volatile market environment. In the last quarter of 2011, optimism about a Euro bailout
and good projected US retail sales helped boost US equity returns for the year.
Founded in 1988, Indiana
Trust and Investment Management
Company is an
independent trust company
chartered under the Indiana
banking statutes. It is a single purpose financial institution dedicated exclusively
to providing investment management and trust services to
individuals, trusts, employee
benefit plans, corporations,
and not-for-profit organizations
Returns: 4th Quarter 2011 and Full Year 2011
ASSET CLASS
4Q 2011
2011
Equities
Large Cap US Equities (S&P 500)
11.8%
2.1%
Mid/Small Cap US Equities (Russell 2000)
15.5%
-4.2%
International Developed Market Equities (MSCI EAFE)
3.3%
-12.1%
Emerging Market Equities (MSCI Emerging Markets)
4.4%
-18.4%
Barclays Capital US Aggregate Bond Index
1.1%
7.8%
BofA Merrill Lynch Municipals, 3-7 yr
1.4%
6.9%
15.2%
8.3%
Fixed Income
Alternatives
Real Estate (FTSE NAREIT Equity REITS)
Please join us for the next
Quarterly Investment
Briefing:
Phone: 574-271-0374
Fax: 574-271-0378
The ITC Advisor is published four times a year. All articles contained herein are
solely for general information purposes, and are not to be construed as legal,
accounting, or other professional advice. The authors and publisher, accordingly, assume no liability whatsoever in connection with the use of this material. Every effort has been made to ensure this material is correct at the time
of publication.
Wednesday,
May 2, 2012
8:00 a.m. to 9:00 a.m.
Windsor Park
Conference Center
4020 Edison Lakes
Parkway
Mishawaka, IN 46545
In 2011, investors gravitated to incomegenerating US stocks (such as utilities) and
steady, defensive sector stocks (such as
healthcare and consumer staples). On the
flip-side, concern over Euro debt exposure
and regulatory uncertainty led to large declines in financial stocks. The net effect was
a +2.1% return on Large Cap US stocks for
the year. Mid/Small Cap US equities rallied
strongly in the 4th quarter (+15.5%), but it
was not enough to erase downturns driven
by market volatility earlier in the year and
they ended down -4.2% at year end.
International developed market stocks did
not rally as strongly as US markets in the 4th
quarter as investors remained concerned
about a recession beginning in Europe and a
slower growth outlook for that region. This
kept a lid on international stock returns, and
it created a “flight to safety” push into US
dollar-based assets. One result of this was a
stronger US dollar, which dampened international stock returns for the year.
The stronger dollar also helps explain part
of the 2011 Emerging Markets return: stripping out the currency impact on returns,
Emerging Markets were down -12.5%, a
result very close to the local currency returns in international developed markets.
Continued on Page 2