2011: The Year in Two Headlines

Choose your headline...

Investors' Morale Crushed by Market Volatility
For months the financial media told investors to prepare for a 2008-9 financial meltdown and a return to recession conditions.  We call this, "fighting the last war."  The failure of Lehman Brothers in 2008 was a total surprise even to employees of the firm.  With the financial system leveraged to the highest levels since the Long Term Capital Management failure in 1999, banks fell like dominoes.  4 years later, banks are dramatically deleveraged.  Meanwhile, banks have had plenty of time to prepare their balance sheets should one or more major European banks fail.  So far, all we have seen is the bankruptcy of MF Global, which followed the same high leverage investments in questionable securities that took out Bear Stearns in March 2008.  Unraveling that mess will take a while, but the system easily absorbed the loss even if $1.2 billion in customer funds cannot be accounted for.


With Three Weeks Remaining, US stocks up 1.8% YTD in 2011
Our January forecast for the S&P 500 was 8% in 2011.  US stocks surpassed that forecast by April 29th with a gain of 9%.  At that point, with S&P 500 earnings were growing in the mid teens, we thought thatthe US stocks had the potential to gain even more for 2011.  However, macro concerns dominated headlines for the rest of the year including:

  • Supply chain disruption from the Japanese earthquake of March and follow-on nuclear plant problems
  • US Congress bungles the debt ceiling legislation in July
  • Standard & Poors downgrades US debt in August
  • The permanent circus in Europe regarding Greek, Spanish, Irish, Portuguese and Italian debt and whether the Euro can be saved

Read the rest of the commentary here.