Many of you reading this will be surprised to discover that 2012 was a great year to be an investor. Amid the unhappy headlines, anxiety over America’s finances, a highly-partisan presidential election, worries about the Eurozone and the potential for recession, stocks quietly rewarded patient investors with double-digit gains.
The Wilshire 5000–the broadest measure of U.S. stocks and bonds–rose 16.06% for the year. The comparable Russell 3000 index rose 16.42% in 2012.
The other stock market sectors moved in a very similar pattern. Large cap stocks, represented by the Wilshire U.S. Large Cap index, were up 15.74% for the year. The Russell 1000 large-cap index gained 16.42%, while the widely-quoted S&P 500 index of large company stocks gained 13.41% in 2012.
Meanwhile, the Wilshire U.S. Mid-Cap index index rose 16.25% after gaining 3.92% in value in the fourth quarter of the year. The Russell midcap index was up 17.28% for the year.
Small company stocks also posted significant gains. The Wilshire U.S. Small-Cap gained 3.10% in the fourth quarter to finish the year up 18.76%. The Russell 2000 small-cap index gained 3.56% in the three months ending December 31, and finished the year up 16.35%. The technology-heavy Nasdaq Composite Index was up 15.91% for the year.
Every single industry sector in the S&P 500 except utilities posted gains in calendar 2012, led by telecommunication stocks (up 12.50%), information technology (up 13.15%), consumer discretionary goods manufacturers (up 21.87%), and financial stocks (26.26% gains for the year).
Global stocks provided comparable returns. The broad-based EAFE index of larger companies in developed economies rose 13.56% for year, after a strong 5.38% quarterly return. The stocks across the Eurozone economies returned a robust 17.45% for the year, outpacing the Far East economies (9.11% for 2012). The EAFE Emerging Markets index of lesser-developed economies rose 15.21% for the year.
The dark clouds were relatively small. Commodities barely eked out positive returns, with the S&P GSCI index rising 0.08% for the year, led by agriculture (up 6.46%) and precious metals (up 6.21%). Energy stocks were down 1.37%.
Real estate investments were among the biggest gainers, with the Wilshire REIT index posting a 17.59% gain for the year.
Investors who believed the negative headlines and pulled their money out of equities into safer havens suffered accordingly. Treasury bonds are still mored in near-record low-return territory; if you lend the U.S. government money by purchasing a 2-year Treasury, your current coupon rate is 0.25% a year. Five-year yields are still below 1% (0.72%), and 10-year (1.76%/year) and 30-year (2.95%) T-bonds are not in danger of enriching their purchasers. Muni bonds are sporting aggregate yields of 0.20% (1-year), 0.29% (2-year), 0.84% (5-year) and 1.69% (10-year). The aggregate of all AAA corporate bonds is yielding 0.72% for bonds with a five-year maturity; 1.76% if you go out ten years.
It is helpful to remember that the year started off with dire predictions and a lot of uncertainty about the prospects for the U.S. and global economies. The housing market was weak, unemployment was high, the Euro economies were in recession (or, in the case of Greece, bankrupt), and it was not hard to find blogs and even economic reports that predicted a catastrophic year. Investors who ignored the gloom and doom were rewarded with returns approximately twice as high as the historical averages.
Meanwhile, Washington policymakers finally reached a so-called “fiscal cliff” deal that seems to have pleased nobody except giddy investors on the following trading day. Among other things, it appears that our lawmakers are creeping closer to reality about how to define “the rich;” rather than $200,000 (single taxpayers) or $250,000 in adjusted gross income (joint returns), as specified in many prior proposals, “the rich” are now defined as making more than $400,000 (single) or $450,000 (joint). For taxpayers whose income falls below those thresholds, the temporary Bush-era tax cuts have been made permanent, and marginal tax rates will remain the same this year as they have been for the past two. Taxpayers who fit this new definition of “the rich” will experience a new 39.6% upper tax bracket, and pay taxes on capital gains and dividends at a 20% tax rate. (The 15% rate still applies to taxpayers below the thresholds.) In addition, the law borrows something from the Clinton era tax code: itemized deductions and the personal exemption begin phasing out for individuals with more than $250,000 in adjusted gross income, or couples with more than $300,000 AGI. At $122,501 of income beyond the threshold, personal exemptions are phased out in their entirety.
The tax bill also maintains the current $5 million estate and gift tax exemptions ($10 million for couples), but raises the tax rate for money transferred to heirs above that amount from 35% to 40%. And it offers a permanent fix to the alternative minimum tax problem by inflation-indexing the threshold (currently $78,750 for joint filers; $50,600 for individuals) at which people have to calculate their AMT, exempting all but about 5 million taxpayers from this chore now and in the future.
Also eliminated: the two percentage point reduction in the Social Security payroll tax–a stimulus measure enacted in 2010, which is likely to be the biggest impact of the legislation on most taxpayers. The payroll tax rises from 4.2% last year to 6.2% this year.
Finally, the new tax law makes $24 billion in federal spending cuts, while giving Congress two additional months to decide what to do about $109 billion of automatic spending cuts that were scheduled to begin taking effect at the start of this year.
It is clear that the U.S. and global economy are still in a slow-growth recovery period, but there is some reason to be optimistic that 2013 could be a turning point in the long climb out of the Great Recession. After six years of decline, the housing market appears to have finally bottomed out in 2012. The inventory of homes on the market is down 20% or more from a year ago, and sales of existing single-family homes jumped 11% in 2012. Bank of America Merrill Lynch economies expect at least a 3% gain from the housing sector this year, which would flip this large sector of the economy from a drag on economic growth to a boost, along the way creating construction jobs and boosting sales of appliances and other products that go with home purchases.
At the same time, the National Association for Business Economics is forecasting a slow but steady increase in employment this year, and consumer debt is shrinking. The still-weak global economy seems unlikely to cause gas prices to rise dramatically, and some economists have pointed to the record amount of money parked in Treasuries (hence the low rates), which, if people become more confident in the stock market, could be redeployed into equities and cause prices to rise.
None of this, of course, is guaranteed, and it would be nice if our government policymakers would finally settle on a plan to reduce the federal debt without wrecking the economy in the process. But those who ignored the optimistic outlook for 2012, and looked at the headlines instead of the millions of workers who got up every day and went to work to build (or rebuild) the economy, probably regret it today. The same could be true for 2013.
Wilshire Index Data: http://www.wilshire.com/Indexes/calculator/
Russell Index Data: http://www.russell.com/indexes/data/daily_total_returns_us.asp
S&P Index Data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf–p-us-l–
Nasdaq Index Data: http://quicktake.morningstar.com/Index/IndexCharts.aspx?Symbol=COMP
International Indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html
Commodities Index Data: http://www.standardandpoors.com/indices/sp-gsci/en/us/?indexId=spgscirg–usd—-sp——
Treasury Market Rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
Aggregate Corporate Bond Rates: http://finance.yahoo.com/bonds/composite_bond_rates
Economic Data: http://www.usnews.com/news/blogs/rick-newman/2012/12/17/how-the-2013-economy-will-be-different
http://money.cnn.com/2012/12/01/pf/economic-outlook-2013.moneymag/index.html
