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THE BESPOKE REPORT
Bespoke Investment Group LLC
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Written by Co-Founders Paul Hickey and Justin Walters
Bespoke Investment Group LLC
105 Calvert Street
Harrison, NY 10528
914-315-1248
The Bespoke Report
Everything Investors Must Know About the
Markets in 2013
Copyright 2012, Bespoke Investment Group, LLC. Bespoke Investment Group, LLC be-
lieves all information contained in this report to be accurate, but we do not guarantee its
accuracy. None of the information in this report or any opinions expressed constitutes a
solicitation of the purchase or sale of any securities or commodities.
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Table of Contents
I. Our View 4
II. Introduction 6
III. Prognostications 11
IV. Valuation 16
V. Sentiment 26
VI. Washington 30
VII. Seasonality 41
VIII. Sector Weightings & Technicals 53IX. Economic Indicators 62
X. Economic Cycles 74
XI. Housing 95
XII. Yield Curve 101
XIII. Dollar & Stocks 106
XIV. Credit Markets 113
XV. Commodities 117
XVI. International 123
XVII. The Year in Headlines 133
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About Bespoke
Bespoke Investment Group prides itself on its original content and intuitivethinking. Our unique ability to analyze financial markets in ways unlike tradi-
tional Wall Street firms is what helps us stay one step ahead of the investment
community. Bespoke provides financial research to individual and institutional
investors as well as money management services. Our work has been used ex-
tensively by some of the most prestigious Wall Street firms and major media
outlets including CNBC, Bloomberg, the Wall Street Journaland Barrons.
Bespoke Investment GroupTurning Information Into Wealth
To learn more about Bespoke, please visit www.bespokepremium.com.
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Our View
With 2012 now relegated to the highlight reel, investors have plenty of reasons to bid goodbye
to the year. For many, the simple fact that we will not have to endure a Presidential campaignis reason enough to look forward to 2013. While there are no shortages of reasons to be
thankful 2012 is behind us, there was plenty to be thankful for in 2012 as well.
The S&P 500 finished 2012 with a gain of more than 10%, and while we didnt get there in a
straight line, anyone who bought the S&P 500 on the last day of 2011 was in the black on that
trade for every day of 2012. Up years are common in the equity market, but going back to
1928, there have only been nine other years where the S&P 500 was up YTD at the close of
trading every day of the year.
As the report that follows illustrates, the current economic recovery has been one of the
weakest on record in terms of GDP growth and just about every other metric outside of manu-
facturing. Not only has the recovery been weak, but it is also no longer a spring chicken. At a
length of 42 months, the recovery off the June 2009 lows is now just three months shorter
than average. With a weak foundation already, bears would argue that the stage is set for a
recession in 2013.
As if the weak recovery was not bad enough, we have complete dysfunction out of Washing-
ton. For businesses and consumers alike, Reagans comments from thirty years ago have
never rung more true. Far from being the solution to the problems faced by Americans, Wash-
ington is the problem. Unlike any other time in a generation, individuals and businesses are
increasingly concerned with how events in Washington will negatively affect their lives.
In addition to the current situation, the historical precedent suggests that Washington will not
be a positive influence on the market in 2013 and the years ahead. The second terms of US
Presidents have been notoriously bad for financial markets as administrations tend to lose fo-
cus or scandals are uncovered. Going back to 1900, the S&P 500 has averaged a decline of
3.8% during the first year of a re-elected Presidents second term.
With an already slow recovery thats not getting any younger and continued dysfunction out
of Washington, it should not be a surprise that economists are expecting growth of just 2% in
2012. Along with low economic growth, it is not surprising that strategists, a normally bullish
group, are expecting a gain of less than 8% for the S&P 500 in 2013. it doesnt seem like there
is a lot to be bullish about these days.
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Our View
Yes, there are plenty of aspects regarding the market and economy that are less than optimal,
but when is that not the case? There are also plenty of positives that emerged in 2012 that wethink can continue to move into the spotlight in 2013. For starters, in spite of all the negative
events within the market and the numerous pullbacks we saw in 2012, the S&P 500s uptrend
off the March 2009 lows remains intact.
The economy, while not particularly strong, has not been especially weak either. It is a little
less hot than Goldilocks, but the US economy did finish 2012 with some positive momentum,
and this came in spite of all the roadblocks from Washington. Housing has been and will con-
tinue to provide a boost to US economic growth. Provided we dont see even more onerous
regulations on the energy sector, the US also has the potential to see an energy boom in the
years ahead.
As the fiscal cliff and debt ceiling debates become resolved (not necessarily a foregone conclu-
sion), we expect the US to resume its trend of outperformance relative to the rest of the
world. This will boost the dollar, and a strong dollar has historically been a positive for US eq-
uities. Sectors that tend to benefit the most form a strong dollar are the ones that derive the
majority of their revenues in the United States like Consumer Discretionary, Financials, Health
Care, and even Utilities.
If these positive headwinds can continue in 2013, the potential for US equities is extremely
positive. Closing out the year, the S&P 500s valuation is cheap by just about every traditional
measure, and it is not just slightly cheap. Analysts are currently expecting operating earningsof $112.82 for the S&P 500. If the index were to trade simply at an average P/E ratio of 15.33,
that would translate to a level of around 1,730 on the S&P 500 for year end 2013, or a gain of
22%. Granted, analysts are often overly optimistic, but even if there is no earnings growth in
2012, earnings would come in at $99.38. Based on this level of earnings, an average P/E ratio
of the S&P 500 would still work out to 1,523.5, or 7% above current levels.
Where will 2013 pan out? We expect it to be somewhere in between, and we see the S&P 500
trading at or near a level of 1,600 in the year ahead. In terms of percentages, this works out to
a gain of around 13%. 13% in 13 we like the sound of that. Happy New Year!
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The S&P 500 started 2012 with a rip-roaring rally, gaining more than 10% in the first quarter.
But what goes up must come down, and thats just what happened in April and May when the
market gave up ALL of its first quarter gains due to the euro crisis. On the day that the Su-
preme Court health care ruling came down, the market bottomed, however, and it didnt look
back from June through mid-September. Unfortunately, what could have been a stellar year
turned into just a decent one when fiscal cliff issues took control of the market in the fourth
quarter, leaving the S&P up 12.5% YTD, well below its third quarter high.
S&P 500 in 2012
+13% YTD
-0.01
0.10
-0.03
0.13
0.04
-0.1
0.0
0.1
0.1
0.2
0.2
1250
1300
1350
1400
1450
1500January February March April May June July August Sept. October Nov. Dec.
4.36% 1.26% 2.42%4.06% -6.26%-0.75% 3.96% 1.98% 0.28%-1.97%3.13%
-4
-2
0
2
4
6
8
Daily % Change
Monday Tuesday Wednesday Thursday Friday
Monday Tuesday Wednesday Thursday Friday
Average % Change by Day of Week
Average Day of Week % Chg by Month
0.42%
January February March April May June July August Sept. October Nov. Dec.
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Below is a table highlighting the performance of various asset classes (using ETFs) in 2012. Af-
ter falling significantly in 2011, Europe bounced back in a big way in 2012, with France, Ger-
many, the UK and even Italy posting gains of more than 10%. Mexico and Germany were the
best performing ETFs on the entire list in 2012 with gains of more than 28%.
US index ETFs were mostly up in the mid-teens in 2012, but Midcaps performed the best. Of
the ten S&P 500 sectors, the Financials did the best with a gain of 25.69%, followed by Con-
sumer Discretionary at +21.23%. The Utilities sector was the only one that declined for the
year at 3.49%. The bulk of the red on the matrix comes from the commodities sector, while
fixed income posted minimal gains for the full year even though it struggled in the 2nd half.
US Related Global
ETF Description Dec. Q4 2012 ETF Description Dec. Q4 2012
SPY S&P 500 -0.15 -1.41 13.10 EWA Australia 0.52 5.51 17.07DIA Dow 30 0.17 -2.78 6.95 EWZ Brazil 8.36 3.39 -2.61
QQQ Nasdaq 100 -1.20 -5.19 16.44 EWC Canada 1.10 -0.25 6.84
IJH S&P Midcap 400 1.46 2.94 15.95 FXI China 8.82 16.84 15.93
IJR S&P Smallcap 600 2.11 1.09 14.07 EWQ France 4.99 12.25 20.28
IWB Russell 1000 0.09 -0.82 13.64 EWG Germany 4.89 9.30 28.36
IWM Russell 2000 2.33 0.67 13.89 EWH Hong Kong 1.67 6.76 25.60
IWV Russell 3000 0.35 -0.62 13.67 INP India 0.46 1.16 27.37
NYC NYSE Comp 1.34 1.83 11.97 EWI Italy 5.10 11.39 11.76
EWJ Japan 4.50 6.27 6.97
IVW S&P 500 Growth -0.94 -2.92 12.09 EWW Mexico 4.49 7.48 30.73
IJK Midcap 400 Growth 0.70 2.14 15.83 EWP Spain 4.36 8.99 -0.30
IJT Smallcap 600 Growth 2.03 0.24 12.54 RSX Russia 7.29 3.75 12.08
IVE S&P 500 Value 1.07 0.49 14.32 EWU UK 1.04 2.69 10.54IJJ Midcap 400 Value 2.11 3.47 15.77
IJS Smallcap 600 Value 2.40 2.05 15.57 EFA EAFE 3.03 7.06 14.56
DVY DJ Dividend -1.09 -1.16 6.03 EEM Emerging Mkts 6.01 7.19 16.75
RSP S&P 500 Equalweight 1.37 1.82 14.80 IOO Global 100 1.32 2.08 9.94
EEB BRIC 4.00 1.10 2.40
FXB British Pound 1.25 0.43 4.13
FXE Euro 1.45 2.56 1.58 DBC Commodities -1.28 -3.28 3.35
FXY Yen -5.03 -10.16 -11.65 USO Oil 2.43 -2.26 -12.49
UNG Nat. Gas -7.31 -11.43 -26.86
XLY Cons Disc -0.48 1.10 21.23 GLD Gold -2.39 -5.71 6.64
XLP Cons Stap -3.58 -3.00 6.96 SLV Silver -9.02 -12.07 9.28
XLE Energy 0.00 -3.23 2.79
XLF Financials 3.68 4.81 25.69 SHY 1-3 Yr Treasuries -0.04 -0.11 -0.11
XLV Health Care -1.13 -0.83 14.69 IEF 7-10 Yr Treasuries -1.22 -0.91 1.80
XLI Industrials 1.75 3.42 11.94 TLT 20+ Yr Treasuries -3.02 -2.58 -0.19
XLB Materials 2.04 1.77 11.79 AGG Aggregate Bond -0.65 -0.82 1.15
XLK Technology -0.88 -6.33 13.46 BND Total Bond Market -0.58 -0.83 1.17
IYZ Telecom 1.21 -5.33 15.10 TIP T.I.P.S. -1.23 -0.30 4.04
XLU Utilities -1.68 -4.58 -3.49
Key ETF Performance (%)
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We ran our decile analysis on the S&P 500 to see which stock characteristics helped or hurt
stocks in 2012. To do this, we broke the index into deciles (10 groups of 50 stocks each) based
on the various categories listed in the matrix below, and then we calculated the average per-
formance of stocks in each decile in 2012.
A few key characteristics impacted performance significantly in 2012. These were P/E ratio,
dividend yield and international revenue exposure. As shown below, the best performing dec-
ile in the entire matrix was the one made up of the 50 S&P 500 stocks with the highest P/E ra-
tios. These stocks were up an average of 29.25%. The worst performing decile in the entire
matrix was the one made up of the S&P 500 stocks with the highest dividend yields. The
stocks in this decile actually averaged a decline of 0.63% in 2012, compared to an average gain
of 12% for all S&P 500 stocks. Based on the weak performance of high yielding stocks and the
strong performance of the stocks with the least attractive valuations, investors were clearly in
risk-on mode in 2012, looking for growth instead of value.
The final characteristic that impacted performance in 2012 is international revenue exposure.
As shown, the decile of stocks with the most international revenue exposure were up just
0.21% in 2012. While global stock markets did well during the year, the euro crisis caused US
investors to shun US stocks with heavy international exposure.
Decile 1 2 3 4 5 6 7 8 9 Decile 10
Market Cap
(Largest to
Smallest)
14.47% 12.77% 9.94% 7.84% 14.74% 13.22% 11.22% 13.43% 11.18% 18.27%
P/E Ratio (Lowest
to Highest) 14.39% -0.32% 14.75% 11.75% 12.26% 13.08% 10.69% 12.58% 8.64% 29.25%
Dividend Yield
(Highest to
Lowest)*
-0.63% 8.51% 15.19% 14.54% 11.12% 10.23% 13.43% 14.49% 17.82% 16.75%
Short Interest
(Lowest to
Highest)
7.75% 18.73% 13.50% 12.50% 16.85% 12.16% 12.49% 8.56% 7.80% 16.74%
Analyst Ratings
(Best to Worst)14.92% 10.99% 10.26% 11.25% 17.11% 6.75% 21.75% 13.37% 4.51% 16.18%
Institutional
Ownership (Most
to Least)
12.26% 9.72% 8.57% 16.86% 14.61% 25.45% 16.16% 8.91% 7.21% 7.39%
International
Revenues
(Most to Least)**
0.21% 12.16% 12.43% 11.01% 23.71% 14.87% 14.66% 11.58% 11.76% 13.10%
% Chg in 2011
(Best to Worst)12.32% 9.30% 11.00% 14.07% 13.72% 10.04% 16.89% 11.15% 9.92% 17.61%
*Decile 10 of dividend yield category is made up of all stocks that pay no dividend.
**Decile 10 of international revenues category is made up of all stocks that have no international revenues.
S&P 500 Decile Performance in 2012
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With a gain of more than 10% in 2012, the S&P 500s bull market that began back on March
9th, 2009 continued. (To begin a new bear market, the index would need to fall 20% from its
bull market high.)
Below is a snapshot of all S&P 500 bull markets (a rally of 20%+ that was preceded by a decline
of 20%+) since 1928. As shown, the average bull market has seen a gain of 102.22%, and it has
lasted 906 days. The current bull market has eclipsed both of these averages with a gain of
116.66% and a length of 1,285 days. While it may not seem like it, the current bull market cur-
rently ranks as the 9th longest on record, and if the S&P 500 makes a new high in 2013, it
could move all the way up to the 6th longest depending on when the high occurs.
Begin End % Change Days Begin End % Change Days
12/4/1987 3/24/2000 582.15% 4,494 12/30/1927 9/16/1929 80.41% 626
6/13/1949 8/2/1956 267.08% 2,607 11/13/1929 4/10/1930 46.77% 148
10/3/1974 11/28/1980 125.63% 2,248 12/16/1930 2/24/1931 25.83% 70
7/23/2002 10/9/2007 96.21% 1,904 6/2/1931 6/26/1931 25.82% 24
8/12/1982 8/25/1987 228.81% 1,839 10/5/1931 11/9/1931 30.61% 35
10/22/1957 12/12/1961 86.35% 1,512 6/1/1932 9/7/1932 111.59% 98
4/28/1942 5/29/1946 157.70% 1,492 2/27/1933 7/18/1933 120.61% 141
6/26/1962 2/9/1966 79.78% 1,324 10/19/1933 2/6/1934 37.28% 110
3/9/2009 9/14/2012 116.66% 1,285 3/14/1935 3/10/1937 131.64% 727
5/26/1970 1/11/1973 73.53% 961 3/31/1938 11/9/1938 62.24% 223
10/7/1966 11/29/1968 48.05% 784 4/11/1939 10/25/1939 26.78% 197
3/14/1935 3/10/1937 131.64% 727 6/10/1940 11/7/1940 26.70% 150
12/30/1927 9/16/1929 80.41% 626 4/28/1942 5/29/1946 157.70% 1,4925/19/1947 6/15/1948 23.89% 393 5/19/1947 6/15/1948 23.89% 393
3/31/1938 11/9/1938 62.24% 223 6/13/1949 8/2/1956 267.08% 2,607
4/11/1939 10/25/1939 26.78% 197 10/22/1957 12/12/1961 86.35% 1,512
6/10/1940 11/7/1940 26.70% 150 6/26/1962 2/9/1966 79.78% 1,324
11/13/1929 4/10/1930 46.77% 148 10/7/1966 11/29/1968 48.05% 784
2/27/1933 7/18/1933 120.61% 141 5/26/1970 1/11/1973 73.53% 961
10/19/1933 2/6/1934 37.28% 110 10/3/1974 11/28/1980 125.63% 2,248
9/21/2001 1/4/2002 21.40% 105 8/12/1982 8/25/1987 228.81% 1,839
6/1/1932 9/7/1932 111.59% 98 12/4/1987 3/24/2000 582.15% 4,494
12/16/1930 2/24/1931 25.83% 70 9/21/2001 1/4/2002 21.40% 105
11/20/2008 1/6/2009 24.22% 47 7/23/2002 10/9/2007 96.21% 1,90410/5/1931 11/9/1931 30.61% 35 11/20/2008 1/6/2009 24.22% 47
6/2/1931 6/26/1931 25.82% 24 3/9/2009 9/14/2012 116.66% 1,285
Average 102.22% 906 Average 102.22% 906
S&P 500 Bull Markets S&P 500 Bull Markets
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Although the S&P 500 finished 2012 with a gain of more than 10%, the DJIAs return came in
at a much tamer 6.1%. Going back to 1900, there have actually been 18 other years where the
DJIA saw a single digit percentage gain.
In the chart below, we show annual returns for the DJIA grouped according to their percent-
age moves. Underneath each group, we highlight the average annual change in the DJIA in the
year after similar moves. Small annual changes in the DJIA are not necessarily such a bad
thing, and can even be considered a pause that refreshes. When the DJIA sees an annual gain
of between 0% and 10%, the average change in the following year is a gain of 6.2%. Of those
18 years, the index has been up 61% of the time which is slightly less than the historical aver-
age for all years since 1900 (64% of the time positive).
1982: 19.61961: 18.7
1976: 17.9
1950: 17.6
1952: 8.4 1963: 17.0
1912: 7.7 1959: 16.4 1938: 28.1
1960: -9.3 1942: 7.6 2006: 16.3 1927: 27.7
1981: -9.2 2012: 7.1 1998: 16.1 1985: 27.7
1901: -8.7 2007: 6.4 1967: 15.2 1989: 27.0
1946: -8.1 1971: 6.1 1909: 15.0 1945: 26.6
2001: -7.1 2011: 5.2 1980: 14.9 1924: 26.2
1966: -18.9 2000: -6.2 1970: 4.8 1972: 14.6 1996: 26.0
1910: -17.8 1990: -4.3 1968: 4.3 1964: 14.6 1925: 25.4
1977: -17.2 1916: -4.2 1979: 4.2 1951: 14.4 2003: 25.3
1929: -17.1 1953: -3.8 1992: 4.2 1943: 14.1 1999: 25.2
2002: -16.7 1984: -3.7 1934: 4.1 1993: 13.7 1936: 24.8
1973: -16.5 1978: -3.1 1926: 4.1 1949: 12.9 1997: 22.6
1907: -37.7 1941: -15.3 1939: -2.9 2004: 3.1 1921: 12.3 1986: 22.6 1935: 38.5
2008: -33.8 1969: -15.1 1923: -2.7 1956: 2.3 1988: 11.9 1922: 21.5 1975: 38.3
1930: -33.7 1974: -27.5 1957: -12.7 1906: -2.3 1987: 2.3 1944: 11.8 1955: 20.8 1905: 37.8 1928: 49.5
1920: -32.9 1903: -23.6 1940: -12.7 1948: -2.1 1947: 2.2 2010: 11.0 1991: 20.3 1958: 34.0 1908: 46.6
1937: -32.8 1932: -23.0 1962: -10.8 2005: -0.6 1994: 2.1 1965: 10.9 1983: 20.3 1995: 33.5 1954: 44.0 1915: 81.5
1931: -52.6 1914: -30.6 1917: -21.7 1913: -10.3 1902: -0.4 1911: 0.2 1918: 10.5 2009: 20.2 1919: 30.5 1904: 42.6 1933: 66.7
-50%+ -40%+ -30%+ -20%+ -10%+ -0%-10% 0%-10% 10%+ 20%+ 30%+ 40%+ 50%+
Average DJIA Return in the Following Year (%)
DJIA: Annual Returns & Average Return in the Following Year: 1900 - 2012
-23.1
22.7
39.5
-0.5
4.2
6.2 5.4 5.83.7
24.6
-6.5
-30
-20
-10
0
10
20
30
40
50
-50%+ -40%+ -30%+ -20%+ -10%+ -0%-10% 0%-10% 10%+ 20%+ 30%+ 40%+ 50%+
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PrognosticationsS&P 500
Below we highlight the 2013 year-end S&P 500 price targets for the main equity strategists at
fourteen Wall Street firms as surveyed by Bloomberg. Collectively, strategists are expectingthe S&P 500 to finish 2013 at 1,531, which would be a gain of roughly 9%. All but one strate-
gist is expecting the index to gain in 2013, with Citigroup and Bank of America expecting the
largest gains. Citigroup has a 2013-year end price target of 1,615, while Bank of America is at
1,600. Oppenheimer, JP Morgan, Bank of Montreal and Goldman Sachs all have price targets
between 1,575 and 1,585, and then HSBC, Credit Suisse, Barclays, Weeden and Stifel Nicolaus
are at 1,500 to 1,560.
The three most bearish strategists for 2013 are Morgan Stanley, UBS and Wells Fargo. Morgan
Stanley expects the S&P 500 to finish 2013 at 1,434, which would be a gain of just 1.85%,while UBS is at 1,425 (+1.21%). Wells Fargo is the lone strategist that expects the S&P 500 to
decline in 2013 down to 1,390.
Firm 2013 Year-End Target % Change
Citigroup 1,615 14.70
Bank of America 1,600 13.64
Oppenheimer 1,585 12.57
JPMorgan 1,580 12.22
Bank of Montreal 1,575 11.86Goldman Sachs 1,575 11.86
HSBC 1,560 10.80
Credit Suisse 1,550 10.09
Barclays 1,525 8.31
Weeden 1,525 8.31
Stifel Nicolaus 1,500 6.53
Morgan Stanley 1,434 1.85
UBS 1,425 1.21
Wells Fargo 1,390 -1.28
Average 1,531 8.76
2013 Wall Street Strategist S&P 500 Year-End Price Targets
-1.3
1.2
1.8
6.5
8.3
8.3
8.8
10.1
10.8
11.9
11.9
12.2
12.6
13.6
14.7
-5 0 5 10 15 20
Wells Fargo
UBS
Morgan Stanley
Stifel Nicolaus
Barclays
Weeden
Average
Credit Suisse
HSBC
Bank of Montreal
Goldman Sachs
JPMorgan
Oppenheimer
Bank of America
Citigroup
2013 % Change
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PrognosticationsS&P 500 Earnings Growth
Below we highlight the 2013 earnings growth expectations for the S&P 500 and its ten sectors.
For the index as a whole, the year is expected to start out weak with earnings growth of just1.5% in the first quarter, but it picks up to the high single digits in the second and third quar-
ter, and for the full year earnings are expected to grow 8.8%.
All ten S&P 500 sectors are expected to see earnings growth in 2013, with Telecom and Mate-
rials expected to see the strongest growth at 20.4% and 19.6%, respectively. The biggest sec-
tor of the market Technology is expected to grow 8.1%, while the second biggest Fi-
nancials is expected to grow 14.3%. Health Care, Energy and Utilities are set to grow in the
mid to low single digits.
2013 S&P 500 Sector Consensus EPS Growth Estimates
1.4
4.8 5.2
7.7 7.8 8.19.5
14.3
19.6 20.4
0
5
10
15
20
25
2013 S&P 500 Consensus EPS YoY % Growth Estimates
3.1
1.5
8.79.6
8.8
0
2
4
6
8
10
12
Q4 12 Q1 13 Q2 13 Q3 13 Full Year
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PrognosticationsUS EconomyEconomists are looking for the US economy to grow just 2% in 2013, which would mean sub-
3% growth for 8 straight years. Inflation is expected to remain very tame as well at just 1.9%.The unemployment rate is expected to continue lower but not by much, falling from an aver-
age of 8.1% in 2012 down to 7.7% in 2013. By the fourth quarter of 2013, economists expect
the unemployment rate to be at 7.5%, which is well above the 6.5% level the Fed needs to see
before thinking about tightening monetary policy.
Real GDP YoY% Economist Estimates
3.10
2.701.90
-0.30
-3.10
2.401.80 2.20 2.00
2.80
-4.0-3.0-2.0
-1.00.0
1.02.03.04.0
GDP
Yearly4.10
2.00
1.30
3.10
1.401.60
2.102.50 2.70
2.80
0.0
1.0
2.0
3.0
4.0
5.0
Q411
Q112
Q212
Q312
Q412
Q113
Q213
Q313
Q413
Q114
GDP
Quarterly
CPI YoY% Economist Estimates
3.38
3.232.87
3.85
-0.35
1.63
3.17
2.101.90 2.10
-1.0
0.0
1.0
2.03.0
4.0
5.0
CP
I
Yearly
3.30
2.83
1.90
1.70
2.001.70
2.00 1.90 2.10 2.10
0.0
1.0
2.0
3.0
4.0
5.0
Q411
Q112
Q212
Q312
Q412
Q113
Q213
Q313
Q413
Q114
CPI
Quarterly
Unemployment Rate % Economist Estimates
5.10
4.60 4.60
5.80
9.309.60
9.008.10
7.707.30
2.0
4.0
6.0
8.0
10.0
Unemp.Ra
te
Yearly8.70
8.278.17
8.07
7.80 7.80 7.807.70
7.50 7.50
7.0
7.5
8.0
8.5
9.0
Q411
Q112
Q212
Q312
Q412
Q113
Q213
Q313
Q413
Q114
Unemp.
Ra
te
Quarterly
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PrognosticationsInterest Rates
In terms of interest rates, economists expect the yield on the 10-Year Treasury Note to rise to
2.17% in 2013. They expect the 2-Year Treasury to jump from 0.26% to 0.43% for the full yearand then to 0.51% by the first quarter of 2014. The 10-Year/2-Year spread would jump from
1.4 percentage points up to 1.74 percentage points if estimates are correct, which would likely
be a signal of economic strength if it pans out. The Fed Funds Rate is obviously expected to
remain where it is.
10-Year Treasury Yield Consensus Economist Estimates
4.39
4.70
4.03
2.21
3.84
3.301.88 1.66 2.17
0.0
1.0
2.0
3.0
4.0
5.0
Yield
Yearly
1.88
2.21
1.65
1.63
1.661.77
1.88 2.02
2.17
2.34
1.01.21.41.61.8
2.02.2
2.42.6
Q411
Q112
Q212
Q312
Q412
Q113
Q213
Q313
Q413
Q114
Yie
ld
Quarterly
2-Year Treasury Yield Consensus Economist Estimates
4.40
4.81
3.050.77
1.140.60 0.24 0.26 0.43
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Yield
Yearly
0.24
0.33
0.300.23
0.26 0.270.32
0.36
0.43
0.51
0.1
0.2
0.3
0.4
0.5
0.6
Q411
Q112
Q212
Q312
Q412
Q113
Q213
Q313
Q413
Q114
Yield
Quarterly
Fed Funds Rate Consensus Economist Estimates
4.25
5.25
4.25
0.25 0.25 0.25 0.25 0.25 0.25
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Yield
Yearly
0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
0.1
0.2
0.3
0.4
Q411
Q112
Q212
Q312
Q412
Q113
Q213
Q313
Q413
Q114
Yield
Quarterly
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PrognosticationsCurrencies
Currency strategists expect the dollar to gain slightly versus the euro in 2013 from 1.28 to
1.27. The euro is expected to gain the loss back in 2014 with a jump back up to 1.28.
Euro Consensus Economist Estimates
1.18
1.32
1.461.40
1.43
1.341.30 1.28 1.27 1.28
1.0
1.1
1.2
1.3
1.4
1.5
USD/EUR
Yearly
1.30
1.33
1.27
1.291.28 1.28 1.28
1.27 1.27
1.2
1.3
1.3
1.3
1.3
1.3
Q411
Q112
Q212
Q312
Q412
Q113
Q213
Q313
Q413
USD/EUR
Quarterly
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Valuation
In last years report we identified a trend that began with the Financial Crisis and continued in
the years that followed. That trend is investors increasingly shifting their focus from funda-mentals and valuations to more macro related issues. Whether it has been the ongoing debt
crisis in Europe, the economic slowdown and transition of power in China, geo-political issues
in the Middle East, or political issues here at home, valuations have taken a back seat. In last
years report, we argued that this would be less evident in 2012, and while macro related is-
sues still moved the market up and down, attractive valuations provided a cushion on the
downside and room for multiple expansion.
Part of the reason for the lack of focus on company fundamentals may be related to the fact
that holding periods have shortened so much. If you only plan on holding a stock for a few
weeks, you are less likely to care as much about the stocks valuation. That being said, ulti-mately valuations matter. As we began to see in 2012, as the market becomes less volatile,
valuations will play a larger role.
Closing out 2012, the S&P 500 is trading at about 14.64 times trailing earnings (through Q3
2012), which is a modest increase from the start of the year when the index was trading at just
above 13 times trailing earnings. Even after this years multiple expansion, though, the index
is still trading below its historical average of 15.33 times trailing earnings. In order to trade at
an average valuation, the S&P 500 would need to trade at 1,500, or 5% above current levels.
S&P 500 Trailing P/E Ratio: 1929 - 2012
5
15
25
35
'29 '39 '49 '59 '69 '79 '89 '99 '09
P/E: 14.64
Long Term Average: 15.33
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It is always dicey to try and place a valuation on future earnings. We know all too well that
analysts have a tendency of being overly optimistic in their assumptions when things are goingwell and overly dour when things are bad. With that caveat in mind, the chart below shows
the P/E ratio of the S&P 500 based on 12-month forward earnings. For this chart we looked at
actual 12-month forward earnings where available and have used estimated earnings to cover
the next four quarters.
Currently, the S&P 500 is trading at 13.7 times next years earnings forecast of 104.55 (Q4
2012 through Q3 2013). This is eight percent below the historical average of 14.91, meaning
that the S&P 500 would have to trade at 1,560 to get to average. So whether you want to look
at earnings on a trailing or forward basis, the S&P 500 is anywhere from 5% to 9% underval-
ued. This relative undervaluation implies that even if earnings growth for calendar year 2013comes in below the 14% growth currently forecast, there is still room for error. In fact, even if
earnings show zero growth in 2013, the S&P 500 would still be modestly undervalued based
on its historical average P/E ratio.
With regards to the S&P 500s book value, the index is currently trading at 2.24 times its book
value of $640. Since 1978, the average P/B ratio has been 2.42. Using the average valuation,
the price target for the S&P 500 would be 1,547 assuming no change in book value in 2013.
S&P 500Forward P/E Ratio: 1929 - 2012
5
15
25
35
45
'29 '39 '49 '59 '69 '79 '89 '99 '09
Forward P/E: 13.70
Long Term Average: 14.91
S&P 500 Trailing P/E Ratio: 1929 - 2012
0
1
2
3
4
5
6
'29 '39 '49 '59 '69 '79 '89 '99 '09
P/B: 2.24
Long Term Average: 2.42
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Valuation
With respect to dividend yields, the S&P 500 is finishing off 2012 exactly where it finished off
2011, with a dividend yield of 2.10%. While the index is cheap by just about any measure, divi-dend yield is one measure which is significantly below average. Going back to 1929, the aver-
age dividend yield on the S&P 500 has been 87% higher at 3.92%.
Although the S&P 500s dividend yield is low on an absolute basis, relative to the alternatives,
it is very attractive. At the end of 2011, the S&P 500 was yielding 25% more than the 10-Year
US Treasury. Outside of the credit crisis, the last time the S&P 500 yielded more than the 10-
Year Treasury was before 1960. In order for the dividend yield to get back to its historical av-erage relative to US Treasuries, either the 10-Year yield would have to rise back above 1.9%,
the S&P 500 would have to rally to 1,600, or you would have to see some combination of the
two.
S&P 500 Dividend Yield: 1929 - 2012
0
4
8
12
16
20
'29 '39 '49 '59 '69 '79 '89 '99 '09
Dividend Yield: 2.10 %
Long Term Average: 3.92%
S&P 500 Dividend Yield Relative to Treasuries: 1929 - 2012
0
1
2
3
4
5
6
'29 '39 '49 '59 '69 '79 '89 '99 '09
Dividend Yield Relative to Treasuries: 1.25
Long Term Average: 1.12
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Another way to look at valuations is through the earnings yield of the S&P 500. This is simply a
reverse of the P/E ratio, so instead of dividing price by earnings, you divide earnings by price.
In terms of earnings yield, the S&P 500 is currently yielding 6.83%, which is down from levels
where we started the year and below the historical average of 7.35%. Based on this measure,
the S&P 500 is closing out 2012 at slightly overvalued levels. All else being equal, in order to
have an average earnings yield of 7.35%, the S&P 500 would need to fall to 1,330 based on the
last four quarters of earnings.
Although the S&P 500s earnings yield is modestly below average, relative to an alternative of
long-term US Treasuries, the yield looks considerably more attractive. Going back to 1929, theS&P 500s earnings yield has averaged twice the yield of the 10-year US Treasury. Currently,
the S&P 500s yield is more than four times the yield on the 10-year. So to get to an average
premium, you would need to see some combination of earnings declining, the S&P 500 rising,
and yields rising.
S&P 500 Earnings Yield (%): 1929 - 2012
0
6
12
18
'29 '39 '49 '59 '69 '79 '89 '99 '09
Earnings Yield: 6.83%
Long Term Average: 7.35%
S&P 500 Earnings Yield vs Treasuries: 1929 - 2012
0
3
6
9
'29 '39 '49 '59 '69 '79 '89 '99 '09
Earnings Yield vs Treasuries: 4.13
Long Term Average: 1.99
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Valuation
Some strategists and investors will argue that comparing the earnings yield of the S&P 500 (a
risky asset) to the yield on the 10-Year US Treasury (a so-called risk-free asset) is an apples tooranges comparison. With that in mind, in the chart below we compare the earnings yield on
the S&P 500 to the yield on corporate bonds using the average yield of Moodys AAA and BAA
corporate indices.
The earnings yield of the S&P 500 is currently 1.67 times greater than the yield on corporate
bonds. This represents a slight decline from where we were last year at this time (1.70). Rela-
tive to history, the current level is well above the historical average of 1.43 and near its high-
est reading since the late 1950s. In order for the S&P 500 to trade at an average earnings
yield relative to corporate bonds, either interest rates would need to rise or the S&P 500
would need to rally to 1,667!
Obviously with interest rates at record low levels, the earnings yield of the S&P 500 is going to
be high relative to bond yields. Therefore it is unlikely that these indicators will revert to their
historical averages as long as interest rates remain low. That being said, what we said last
year at this time is just as applicable today. With earnings expected to grow by 11% in 2013,
there is significant room for the market to run and still remain fairly valued.
Looking at the chart above, it is amazing to see how investor sentiment has shifted in the lastdecade. From 1980, through 2010, equities traded at a premium to corporate bonds, but
since 2010 investors have preferred bonds to stocks. Eventually that sentiment will reverse
back to equities over bonds, but historically these shifts have occurred over decades as op-
posed to months or years.
S&P 500 Earnings Yield vs Corporate Bond Yields: 1929 - 2012
0
2
4
6
'29 '39 '49 '59 '69 '79 '89 '99 '09
Earnings Yield vs Corporates: 1.67
Long Term A verage: 1.43
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Comparing the S&P 500s average P/E ratio since the start of 2010 to the average P/E ratio by
decade shows that current valuations havent been this low since the 1980s.
At the same time, dividend yields are only slightly higher in this decade than they were in the
last decade and that was the lowest average dividend yield of any decade since at least the
1930s.
The most encouraging indicators of the ones we looked at is the average ratio of the earnings
yield to the 10-Year Treasury yield and corporate bonds. Since 2010, the earnings yield has
averaged a premium of nearly three times the yield on the 10-Year US Treasury, and premium
of 1.4 times the yield on corporate bonds. The only decades where these two ratios was
higher was in the 1940s and 1950s.
Average P/E Ratio By Decade Average Dividend Yield By Decade
17.6
11.211.9
17.9
12.3 12.0
19.620.2
15.1
0
5
10
15
20
25
30s 40s 50s 60s 70s 80s 90s 00s 2010-
5.95.7
4.9
3.2
4.04.2
2.4
1.8 2.0
0
1
2
3
4
5
6
7
30s 40s 50s 60s 70s 80s 90s 00s 2010-
Average Earnings Yield Relative to 10-Yr Yield Average Earnings Yield Relative to Moodys Corporate Bonds
2.1
5.0
3.4
1.2 1.20.8 0.8
1.2
2.9
0
1
2
3
4
5
6
30s 40s 50s 60s 70s 80s 90s 00s 2010-
1.3
3.2
2.7
1.1 1.0
0.7 0.70.8
1.4
0
0.5
1
1.5
2
2.5
3
3.5
30s 40s 50s 60s 70s 80s 90s 00s 2010-
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So how have P/E ratios changed in this bull mar-
ket relative to the last bull market? In the tableto the right and the chart below, we have shown
how sector P/E ratios have changed since Janu-
ary 2007, which was near the height of the last
bull market and before the credit crisis began to
unfold. As shown to the right, P/E ratios for the
S&P 500 as a whole have compressed by 13.9%
from 16.9 times trailing earnings down to 14.6
times trailing earnings today.
Looking at individual sectors, seven have seen a compression in their P/E ratios over the lastsix years, while just three (Telecom Services, Energy, and Materials) have seen an expansion in
their P/E ratios. Technology has seen the largest compression in its P/E ratio. In January 2007,
the sector had the highest P/E ratio at a level of 23.3. Today, the sectors P/E ratio has de-
clined to 15.1 and now has the fifth lowest P/E ratio of the ten sectors.
Technology, Health Care, and
Energy have seen the largest
move down in the rankings,
while Utilities and Consumer
Staples have seen the biggest
move up in the rankings.
January 2007 December 2012 Change (%)Telecom Svcs 19.3 22.5 16.5
Energy 10.6 11.8 11.5
Materials 15.1 15.6 3.0
Utilities 17.2 15.4 -10.3
Financials 14.2 12.3 -13.0
S&P 500 16.9 14.6 -13.9
Cons Discret. 21.0 17.8 -15.6
Cons Staples 20.6 17.0 -17.7
Health Care 18.6 14.4 -22.7
Industrials 18.6 13.8 -25.9
Technology 23.3 15.1 -35.1
Sector P/E Ratios
S&P 500 Sector P/E Ratios: 2007 - 2012
P/E Ratio: January 2007
P/E Ratio: December 2012
23.3
21.0 20.619.3 18.6 18.6
17.215.1
14.2
10.6
0
5
10
15
20
25
Technology
ConsDiscret.
ConsStaples
TelecomSvcs
HealthCare
Industrials
Utilities
Materials
Financials
Energy
22.5
17.8 17.015.6 15.4 15.1 14.4 13.8
12.3 11.8
0
4
8
12
16
20
24
TelecomSvcs
ConsDiscret.
ConsStaples
Materials
Utilities
Technology
HealthCare
Industrials
Financials
Energy
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In terms of dividend yields, there have been
some big shifts since the height of the last bullmarket. Technology has seen its dividend yield
increase by 120%, but because the yield was
rising off of such a low base, it still has the low-
est dividend yield of the ten sectors. Interest-
ingly, eight of the ten sectors have seen their
dividend yields rise by more than the S&P 500.
This is due entirely to the 44% decline in the
yield of the Financials, which saw its yield drop
from 3.4% down to 1.9%.
In terms of sector rankings, besides the large decline in the rank of Financials from highest
yield in January 2007 to third lowest now, there has not been much in the way of big moves.
As shown, besides Financials, only two other sectors have seen their ranking move by more
than one place (Consumer Staples and Energy).
S&P 500 Sector Dividend Yields: 2000 - 2011
Dividend Yield: January 2007
Dividend Yield: December 2012
3.4
3.12.9
2.6
2.21.9
1.6 1.5
1.2
0.6
0.0
1.0
2.0
3.0
4.0
Financials
TelecomSvcs
Utilities
Materials
ConsStaples
Industrials
HealthCare
Energy
ConsDiscret.
Technology
4.7
4.2
3.1
2.62.4 2.2 2.1
1.91.6
1.4
0.0
1.0
2.0
3.0
4.0
5.0
TelecomSvcs
Utilities
ConsStaples
Materials
Industrials
Energy
HealthCare
Financials
ConsDiscret.
Technology
Technology saw the largest
increase in its yield but is still
the lowest yielding of the ten
sectors. That being said, the
sectors yield is now only 50
basis points below the yield of
the Financial sector.
January 2007 December 2012 Change (%)
Technology 0.6 1.4 119.9
Telecom Svcs 3.1 4.7 53.0
Energy 1.5 2.2 51.5
Utilities 2.9 4.2 43.8
Cons Staples 2.2 3.1 42.8
Cons Discret. 1.2 1.6 37.5
Health Care 1.6 2.1 35.6
Industrials 1.9 2.4 26.7
S&P 500 1.8 2.1 22.9
Materials 2.6 2.6 -1.4
Financials 3.4 1.9 -44.7
Sector Dividend Yields
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Even though most sectors saw multiples expand in 2012, for most their dividend yields in-
creased as well. Even though the S&P 500 saw its dividend yield remain flat at 2.10%, sevensectors saw their dividend yields expand during the year.
The three sectors that saw a decline in their yields were Telecom Services, Health Care, and
Consumer Discretionary. The decline in yields, however, was the result of prices rising faster
than payouts rather than dividends being cut. On the upside, three sectors (Technology, En-
ergy, and Materials) all saw their dividend yields increase by more than 10% this year.
Even with a gain of more than 20% this year, the Financial sector still saw a modest increase in
its dividend yield, which rose from 1.86% to 1.90%. 2012 was a year where Financials found a
firmer foundation, and as the Financial crisis drifts further back into the rearview mirror, com-
panies in the sector will be increasingly raising their payouts. Keep in mind that in early 2007
the sectors dividend yield was 80% higher than it is now.
With tax treatment of dividends likely to change in 2013, the big wildcard is how will compa-
nies react to the changes. Since taxes on dividends dropped to 15% under President George
W Bush, dividends have slowly been trending higher. With higher dividend tax rates on the
horizon, companies issued special and accelerated dividend payments to 2012. Going further
out, will higher taxes make companies less open to raising payouts? Its likely.
Change (%) December 2012 December 2011
Consumer Discretionary -3.05 1.60 1.65
Consumer Staples 7.53 3.12 2.90
Energy 18.47 2.24 1.89
Financials 2.35 1.90 1.86
Health Care -4.98 2.10 2.21
Industrials 1.59 2.43 2.39
Materials 12.86 2.61 2.31
Technology 29.58 1.40 1.08
Telecom Svcs -10.76 4.70 5.27
Utilities 4.42 4.19 4.01
S&P 500 0.00 2.10 2.10
Change in Sector Dividend Yield: 2012 vs 2011
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Although the current bull market is approaching four years in duration, if you talk to the aver-
age investor, many will not even call it a bull market. In 2012, the S&P 500 was up by morethan 10%, but if you asked most casual observers how the market was doing, they would
probably tell you that it was flat, or maybe even down. Furthermore, while the S&P 500 has
yet to take out its 2007 highs in terms of price, on a total return basis, 2012 was the year
where the S&P 500 broke out to a new all-time high.
S&P 500 Total Return Index: 2004 - 2012
800
1,200
1,600
2,000
2,400
'04 '05 '06 '07 '08 '09 '10 '11 '12
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Individual investors are less connected to the market these days than they have probably been
in a generation, but after the events of the last few years, can you really blame them? Withtwo 50%+ haircuts in the S&P 500 over the last twelve years, countless scandals, and market
breakdowns, there is an attitude among most investors that the game is rigged against them.
Because of that attitude, they now have little to no faith in what were once highly regarded
institutions.
Just ten years ago, names like Goldman Sachs, Merrill Lynch, Morgan Stanley, and Smith
Barney were considered the gold standard of and the smartest players within the financial ad-
visory industry. After the scandals and losses of the financial crisis, these firms have lost most
of their cachet. At the same time, the New York Stock Exchange was the pillar of strength in
the financial universe, and Dick Grasso was a household name. Today, the NYSE is in the proc-
ess of being acquired by the Intercontinental Exchange (ICE), which is an organization that did-nt even exist 20 years ago! Likewise, the Federal Reserve and its chairman is no longer re-
ferred to as the maestro, but instead Helicopter Ben.
After enduring the events of the last ten plus years, investors are in a bunker mentality where
they will slowly move into the market as it rises, but once even the slightest hint of trouble
arises, they are quick to get out.
The chart below is a composite index of market sentiment going back to 1990. For this index
we used all of the widely followed sentiment indices around today, and created a normalized
index of sentiment. In the chart, 100% represents average sentiment, so that readings below
100% indicate (red shading) that sentiment is below the historical average, while readings
above 100% are indicative of above average sentiment. As shown in the chart, outside of twobrief periods in this bull market, sentiment towards the equity market has been below aver-
age. In fact, the current stretch of below average sentiment has lasted longer than any other
period going back to 1990. Even during the financial crisis, the streak of below average senti-
ment was not as long.
Bespoke Composite Market Sentiment index: 1990 - 2012
40%
60%
80%
100%
120%
140%
160%
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
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Like the chart of market sentiment on page 27, the chart below is a composite index of eco-
nomic sentiment using widely followed economic sentiment indices. Some of the indices in-cluded in the index are Consumer Confidence, Michigan Confidence, and the NFIB Small Busi-
ness Optimism Index. Like market sentiment, economic sentiment has also been below aver-
age for an extended period of time. In fact, it has now been five years since economic senti-
ment was above average. Just like most investors still arent willing to say we are in a bull
market, most Americans still think the economy is in recession.
The chart below overlays our market and economic sentiment indices since the start of 2009.
The two key takeaways are that sentiment on both fronts remains depressed, and the two in-
dices track each other very closely. The only time they diverged meaningfully was in the late
Summer of 2012, when market sentiment improved as economic sentiment was depressed.
Not long after the S&P 500 peaked in mid September and sold off nearly 10%.
If youre a contrarian, current sentiment towards both the market and the economy should
have you gobbling up stocks like turkey on Thanksgiving!
Bespoke Composite Economic Sentiment index: 1990 - 2012
40%
60%
80%
100%
120%
140%
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Market vs Economic Sentiment: 2009 - 2012
40%
60%
80%
100%
120%
140%
160%
1/09 7/09 1/10 7/10 1/11 7/11 1/12 7/12
Market Sentiment (Left Axis)
Economic Sentiment (Right Axis)
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SentimentAlthough most measures of investor sentiment portray investors to be less bullish than aver-
age, short interest figures provide an alternate narrative. The charts below show the shortinterest as a percentage of float for the S&P 1500 (all caps), S&P 500 (large caps), S&P 400
(mid caps), and S&P 600 (small caps) going back to early 2007, before the onset of the Finan-
cial crisis.
Even though investors have yet to embrace the bull market after nearly four years of gains,
short interest has been in steady decline. For all four indices shown, short interest as a per-
centage of float dropped down to or neared multi-year lows at some point in 2012. Based on
this trend there appears to be a divergence between what investors are saying and actually
doing. Our view, however, is that the deviation represents apathy more than anything else.
As we highlighted earlier in the section, investors seem to be more disconnected to the mar-
kets today than at any other point in the last several years.S&P 1500 Short Interest (Percentage of Float): 2007 -
S&P 500 Short Interest (Percentage of Float): 2007 -
S&P 400 Short Interest (Percentage of Float): 2007 -
S&P 600 Short Interest (Percentage of Float): 2007 -
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
1/07 1/08 1/09 1/10 1/11 1/12
5.8
3.25
3.75
4.25
4.75
5.25
5.75
6.25
1/07 1/08 1/09 1/10 1/11 1/12
3.9%
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
1/07 1/08 1/09 1/10 1/11 1/12
6.3%
6.0
8.0
10.0
12.0
14.0
16.0
18.0
1/07 1/08 1/09 1/10 1/11 1/12
7.1%
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Washington
Unlike any other time in history, Washington DC is more involved in the American economy
than ever before. This is not a political statement, but simply a fact. The chart below showsthe historical share of total GDP that Federal government spending accounts for. After WWII
in 1947, the Federal government accounted for 15.8% of GDP, and except for a period from
the mid 1980s through 2001, this total has been in a steady ascent. As of the end of Q2 2012,
Federal spending now accounts for 23.8% of GDP, representing an increase of 51%!
As if the Federal total wasnt already large enough, when you add up government spending
from all sources as a percent of GDP, you get to a level of 34.8%. This represents an increase
of 72.6% from the 1947 level of 20.15%. For better or worse, government is becoming a larger
share of the US economy. At the rate things are going, this trend will only continue as govern-
ment spending balloons with increased Social Security and Medicare spending. Also, if inter-
est rates start to rise, the cost of servicing the debt load will surge.
Total Federal Government Spending (Percent of GDP): 1947 - 2012
23.78
12
14
16
18
20
22
24
26
'47 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12
Federal/GDP
Average Federal: 19.7%
Total Government Spending (Percent of GDP): 1947 - 2012
34.79
15
20
25
30
35
40
'47 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12
Total Govt/GDP
Average Total Government: 28.5%
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In some respects, the large increase in government spending has been a buffer for the US
economy. Without much of the government expenditures we have seen in the last four years,some would argue that the economy and ultimately the market would be worse off and the
recession that began in late 2007 would have been much worse. Unlike the private sector,
government spending is not cyclical so you can argue that is helps to smooth the business cy-
cle. That may be true, but the other side of the argument is that government spending is less
productive than private sector spending, so when government crowds out the private sector,
you get anemic growth like we have seen during the current economic recovery off the June
2009 trough.
Whatever side of the argument you take on spending and political ideology, US equities have
performed well during President Obamas first term. With a gain of 63.7% (through 12/30),only four other Presidents have seen a better stock market return during their first 1,440 days
in office. Those four Presidents were evenly split between Republicans (Coolidge & Eisen-
hower) and Democrats (FDR & Clinton).
President Start
T Roosevelt 9/14/01
Taft 3/4/09
Wilson 3/4/13
Harding* 3/4/21
Coolidge 8/2/23
Hoover 3/4/29
FDR 3/4/33
Truman 4/12/45
Eisenhower 1/20/53
JFK* 1/20/61
Johnson 11/22/63
Nixon 1/20/69
Ford* 8/9/74
Carter 1/20/77
Reagan 1/20/81
Bush I 1/20/89
Clinton 1/20/93
Bush II 1/20/01
Obama 1/20/09
*President in Office Less Than 1,368 Years. Performance Shown measures, President's total time in office.
= Republicans = Democrats
Percent Change (%) Percent Change (%)
DJIA Performance During First 1,440 Days of a President's Term: 1900 - 2012
-81.1
-150 -100 -50 0
63.7
2.0
102.0
48.6
26.7
0.3
23.8
9.5
21.9
12.2
72.4
10.3
96.3
17.4
13.4
0.5
22.8
0 50 100 150
246.5
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Taking a look at the returns of the DJIA during each US Presidents entire term shows a similar
picture. Of the eleven Republican US Presidents since 1900, the DJIA has averaged an annual-ized return of 3.0%. Under the eight Democratic US Presidents, the DJIA has now averaged an
annualized return of 6.9%, or more than twice the average annualized return of Republicans.
Even though it is Republicans who are more often considered to be better for business, based
on the returns of the DJIA over Obamas first 1,440 days in office and the average returns un-
der Democratic Presidents since 1900, equities have historically preferred the spending ten-
dencies of Democrats.
The argument can be made that you cant just look at the returns of a President while he was
in office as it often takes time for a Presidents policies to take effect and for the policies of the
prior Administration to wear off. Just as Democrats argue that you cant pin the job losses ofObamas first few months in office on him, Republicans argue that the market was so far down
when Obama took office that all it could do was go up. No method no matter how consis-
tently applied is perfect, so there will always be detractors, but the method we used was con-
sistent for each President, so its hard to argue that this method favored any one specific
party.
President Start End Change as President Annualized Return
T Roosevelt 9/14/01 3/4/09 21.6 2.7
Taft 3/4/09 3/4/13 -1.3 -0.3
Wilson 3/4/13 3/4/21 -6.9 -0.9
Harding 3/4/21 8/2/23 17.4 6.9
Coolidge 8/2/23 3/4/29 255.9 25.5
Hoover 3/4/29 3/4/33 -82.8 -35.6
FDR 3/4/33 4/12/45 194.4 9.3
Truman 4/12/45 1/20/53 81.7 8.0
Eisenhower 1/20/53 1/20/61 120.3 10.4
JFK 1/20/61 11/22/63 12.2 4.1
Johnson 11/22/63 1/20/69 30.9 5.3
Nixon 1/20/69 8/9/74 -16.5 -3.2
Ford 8/9/74 1/20/77 23.4 8.9
Carter 1/20/77 1/20/81 -0.9 -0.2
Reagan 1/20/81 1/20/89 135.1 11.3
Bush I 1/20/89 1/20/93 45.0 9.7
Clinton 1/20/93 1/20/01 226.6 15.9
Bush II 1/20/01 1/20/09 -24.9 -3.5
Obama 1/20/09 12/27/12 63.7 13.3
Average 57.6 4.6
Average Republican 44.8 3.0
Average Democratic 75.2 6.9
DJIA Returns Under US Presidents Since 1900
DJIA Percent Change (%)
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As mentioned earlier in this section, there have only been four US Presidents since 1900 that
saw a better DJIA performance during their first term than President Obama. Of those four,Coolidge was the only President who was not elected to his first term as he came into office
following the death of Warren Harding.
For the remaining three Presidents, we analyzed the DJIAs performance during their second
term in office and found mixed results. The charts below highlight the performance of the
DJIA during each of those three periods as well as the performance of the DJIA during each
year of the Presidents second term in office. As shown in the table and the charts, during the
first year of these three second terms, the DJIA averaged a decline of 7.6% with losses two out
of the three times. Although the first year of these three terms was biased towards the weak
side, the second year was positive for all three Presidents with an average return of 23.2%. Inthe third year, returns were generally good with an average return of 11.0%, but in year four
the DJIA declined each time for an average loss of 8.0%. For each of the four-year terms, the
DJIA has averaged a gain of 10.4% with positive returns two-thirds of the time. We would
note, though, that for each term, however, the market was either up or down ~30% or more.
DJIA: 1/20/37 - 1/20/41 (FDR)
-50
-40
-30
-20
-10
0
10
1/19/37 1/19/38 1/19/39 1/19/40 1/19/41
DJIA: 1/21/57 - 1/20/61 (Eisenhower)
-20
-10
0
10
20
30
40
50
1/18/57 1/18/58 1/18/59 1/18/60 1/18/61
DJIA: 1/20/97 - 1/20/01 (Clinton)
-20
-10
0
10
20
30
40
50
60
70
80
1/17/97 1/17/98 1/17/99 1/17/00 1/17/01
First Term
President Political Party All 4 Years 1st Year 2nd Year 3rd Year 4th Year Entire Term
FDR Democrat 241.8 -29.3 14.9 -2.4 -11.4 -29.8
Ei senhow er Republ ican 66.4 -7.0 34.1 9.8 -3.0 32.9
Clinton Democrat 109.9 13.5 20.5 25.5 -9.7 55.0
Average -7.6 23.2 11.0 -8.0 19.4
DJIA Performance (%)
2nd Term
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Looking at second terms from a wider angle, we analyzed the performance of the DJIA during
the second electedterm of US Presidents who were elected to office two or more times since1900. This is a modified look at the Presidential Election Cycle using second terms only. For
the purpose of this analysis, we omitted Presidents who served shortened first terms due to
the fact that they were unelected to office during their 1st term (T. Roosevelt, Coolidge, Tru-
man, and Johnson). Since 1900, there are now eight US Presidents who have been re-elected
to office, which we have highlighted in the table below (charts of each second term are on
page 35). For each President, we have also listed how the DJIA performed during their 1st
term in office as well as the indexs performance during each year of their second terms.
Of the seven US Presidents highlighted above, George W. Bush is the only one who was re-
elected after the market declined during his first term in office (-0.4%). For all seven Presi-
dents, the DJIA averaged a gain of 67% during their 1st term in office. Although voters were
happy to re-elect these Presidents based on their 1st term market returns, a sense of buyers
remorse most certainly followed suit. During the first year of their second terms, the DJIA has
averaged a decline of 3.8% with positive returns just 43% of the time.
Year two for two-termers has tended to see a rebound, as the DJIAs average return has been
+17%. In fact, Richard Nixon, who resigned during year two of his 2nd term, was the only one
who saw a decline during year two of his 2nd term.
While year three of a second term averages a gain of 5.2%, year four has been a disaster. For
the six Presidents who made it to year four of their second term (Nixon resigned), the DJIA av-
eraged a decline of 10.4% with positive returns just 17% of the time. Only Reagan saw a gain
during his final year in office. Overall, the DJIA has averaged a gain of just 10.2% during the
second term of US Presidents who were re-elected to office. Even in this low rate environ-
ment, an annualized return of less than 2.5% is hardly anything to get excited about.
First Term
President Political Party All 4 Years 1st Year 2nd Year 3rd Year 4th Year Entire Term
Wilson Democrat 15.1 -15.6 8.4 7.1 -18.1 -19.8
FDR Democrat 241.8 -29.3 14.9 -2.4 -11.4 -29.8
Eisenhower Republican 66.4 -7.0 34.1 9.8 -3.0 32.9
Nixon Republican 9.7 -16.6 -9.1 -24.3
Reagan Republican 26.4 25.2 35.1 -5.4 13.8 82.1
Clinton Democrat 109.9 13.5 20.5 25.5 -9.7 55.0
Bush Republican -0.4 3.2 15.5 -3.7 -34.3 -24.6
Obama Democrat 63.7
Average 66.6 -3.8 17.1 5.2 -10.5 10.2
Percent of Time Positive 85.7 42.9 85.7 50.0 16.7 42.9
DJIA Performance During Re-Elected Presidents Second Terms: 1900 - 2012
2nd Term
DJIA Performance (%)
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DJIA: 3/5/17 - 3/4/21 (Wilson) DJIA: 1/20/37 - 1/20/41 (FDR)
-40
-30
-20
-10
0
10
20
30
40
3/3/17 3/3/18 3/3/19 3/3/20 3/3/21
-50
-40
-30
-20
-10
0
10
1/19/37 1/19/38 1/19/39 1/19/40 1/19/41
DJIA: 1/21/57 - 1/20/61 (Eisenhower) DJIA: 1/20/73 - 1/20/77 (Nixon)
-20
-10
0
10
20
30
40
50
1/18/57 1/18/58 1/18/59 1/18/60 1/18/61
-50
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
1/19/73 1/19/74 1/19/75 1/19/76 1/19/77
Nixon
Resignation:
8/9/74
DJIA: 1/20/97 - 1/20/01 (Clinton)DJIA: 1/21/85 - 1/20/89 (Reagan)
0
20
40
60
80
100
120
140
1/18/85 1/18/86 1/18/87 1/18/88 1/18/89
-20
-10
0
10
20
30
40
50
60
70
80
1/17/97 1/17/98 1/17/99 1/17/00 1/17/01
DJIA: 1/20/05 - 1/20/09 (Bush II)
-40
-30
-20
-10
0
10
20
30
40
1/19/05 1/19/06 1/19/07 1/19/08 1/19/09
The charts below show the performance of the DJIA during the second terms of the re-elected
US Presidents highlighted on page 34.
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On page 38 we have broken out the performance of the S&P 500 and each individual sector
during each session of Congress from 1961 through the present. In addition to the ten sectors,we have also included the performance of the Transportation sector since up until just a little
over ten years ago, it too was also a sector. The graphic provides a handy reference tool to
quickly assess which sectors did what under different political scenarios.
In the table below we have summarized the performance of the S&P 500 and all ten sectors
under various political scenarios (President, Senate, House) sorted horizontally from most fre-
quent to least frequent. As shown, the two most popular scenarios we have seen are full De-
mocratic Control (eight sessions) and a split between a Republican President and Democratic
Control of both the Senate and House.
Prior to 2011, the current political makeup of Democratic control of the Presidency and Senate
and Republican control of the House had never happened before. Through December 20th,
this split Congress under a Democratic President has worked out pretty well as the S&P 500
has risen 12.0% through 12/27, with nine out of ten sectors advancing (Materials down 2%).
The best performing sectors under this scenario have been Health Care (26.1%), Consumer
Discretionary (24.8%), and Consumer Staples (18.2%).
Control DDD RDD RRD DRR RRR RDR DDR
Congresses 8 8 3 3 2 1 1S&P 500 17.8 7.6 22.4 44.9 27.4 -33.4 12.0
Cons Discret. 35.4 13.5 56.4 37.9 30.6 -23.0 24.8
Cons Staples 10.7 24.8 46.2 37.3 14.5 -14.1 18.2
Energy 31.8 7.9 13.6 34.8 57.7 -24.0 4.0
Financials 12.4 0.5 32.4 61.0 29.5 -25.2 1.6
Health Care 16.8 16.3 39.3 68.3 12.2 -30.3 26.1
Industrials 20.0 7.8 21.7 42.9 30.9 -32.6 7.8
Materials 13.9 7.6 33.6 10.7 33.8 -6.8 -2.0
Technology 33.1 -0.6 17.5 77.3 28.9 -53.8 12.9
Telecom Svcs 0.3 6.7 31.0 36.6 20.0 -44.7 12.6
Transports 27.6 9.3 27.2 29.4 42.2 -21.6 2.0Utilities 5.2 0.6 22.4 29.3 38.3 -54.7 10.5
= Current Makeup
= Makeup With Best Returns for Sector
= Makeup With Worst Returns for Sector
S&P 500 Sector Performance Based on Political Makeup
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Looking at all the various sector performance characteristics based on political control, the ta-
ble below lists average sector performance when either Democrats or Republicans control thePresidency, the Senate, and the House. Based on average returns, the current political
makeup looks positive for equities. For the Presidency, the S&P 500 typically does best when
a Democrat is President with an average return of 24.1% vs. 10.7% when a Republican is Presi-
dent. In the Senate, the S&P 500 has historically done better when the Republican party is in
control (32.1% vs. 10.1%). Finally, in the House, the S&P 500 has averaged a gain of 24.1%
when Republicans are in control and a gain of 14.2% when Democrats are in control.
Based on the election results in November, the political makeup in Washington is best for the
market in terms of the party controlling the Presidency and the House. It would have been the
best of all worlds had Republicans gained control of the Senate, but two out of three isnt bad.
The last two months of 2012 have been a period where the investment community focused
more on Washington than ever before. If there is a smooth resolution to the fiscal cliff early in
2013, the investment community may breathe a big sigh of relief, but based on the experience
of the last few years, and the governments increasingly large role in the economy, we would
expect events in Washington to continue to play an abnormally large role in the markets be-havior.
With respect to Washington, the short term issue is the resolution of the fiscal cliff. On a
longer term basis, investors need to monitor governments share of the economy as well as
the tendency for problems to arise as second term administrations have tended to lose focus.
Sector Democrat Republican Democratic Republican Democratic Republican
Cons Discret. 35.2 22.5 21.9 43.0 29.5 25.4
Technology 42.5 3.7 12.2 42.8 16.5 35.6
Energy 30.3 14.0 16.6 32.6 18.9 28.7
Health Care 30.7 17.3 14.6 43.4 20.2 32.5
Transports 26.0 15.7 15.4 31.8 19.9 21.9
Cons Staples 18.3 25.1 16.2 35.0 22.2 21.3
Financials 23.5 9.6 4.3 42.4 10.5 30.9
Industrials 24.8 11.2 11.0 32.0 15.2 23.7Materials 11.5 15.9 8.9 25.0 14.3 12.6
Utilities 11.8 6.7 0.2 29.0 6.0 17.4
Telecom Svcs 10.5 10.1 1.4 30.3 7.8 17.0
S&P 500 24.1 10.7 10.1 32.1 14.2 24.1
President Senate House
Average Sector Performance Based on Party Control in Washington: 1961 - 2012
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StartYear
1961
1963
196
5
1967
1969
1971
1973
1975
1977
197
9
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
President
D
D
D
D
R
R
R
R
D
D
R
R
R
R
R
R
D
D
D
D
R
R
R
R
D
D
Senate
D
D
D
D
D
D
D
D
D
D
R
R
R
D
D
D
D
R
R
R
D
R
R
D
D
D
House
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
D
R
R
R
R
R
R
D
D
R
1961
1963
196
5
1967
1969
1971
1973
1975
1977
197
9
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
S&P500
8.6
34.3
-5.
2
29.3
-11.3
28.1
-41.9
56.7
-10.6
41.3
3.6
18.9
44.8
14.7
18.9
31.9
5.4
61.3
65.9
7.4
-33.4
37.7
17.0
-36.3
39.2
12.0
ConsDiscret.
22.2
70.7
-6.
1
111.0
-8.4
27.6
-65.0
115.2
-10.6
19.7
74.6
26.6
68.1
9.7
10.2
62.4
1.7
30.7
84.7
-1.7
-23.0
52.6
8.6
-44.1
74.5
24.8
ConsStaples
5.3
21.7
-4.
2
42.9
13.8
37.7
-43.8
48.3
-1.6
-1.8
39.4
21.1
78.1
39.4
68.4
42.6
0.1
67.8
48.6
-4.5
-14.1
15.8
13.3
-8.1
23.1
18.2
Energy
32.7
44.8
-11
.3
33.4
-18.6
16.8
-24.6
55.1
-4.2
117.4
-34.9
38.4
37.3
21.0
28.8
0.0
10.7
53.4
19.6
31.3
-24.0
57.6
57.8
-15.2
31.2
4.0
Financials
30.2
16.0
-11
.3
38.7
-5.7
34.8
-29.1
18.1
-19.6
16.9
29.4
12.2
55.6
-13.2
-7.3
72.2
0.9
97.3
59.3
26.3
-25.2
38.5
20.5
-65.9
27.2
1.6
HealthCare
-1.4
33.4
27.5
29.3
16.0
52.7
-26.4
-4.3
-3.4
33.0
13.6
16.0
88.2
22.4
67.5
23.0
-1.9
83.5
101.6
19.8
-30.3
13.6
10.9
-20.4
17.9
26.1
Industrials
7.3
35.8
-4.
9
32.6
-10.7
30.7
-42.0
56.2
-10.3
44.1
2.1
18.2
44.8
19.0
10.7
34.5
10.3
66.8
36.6
25.4
-32.6
50.4
11.4
-35.8
45.3
7.8
Materials
12.8
34.1
-29
.4
15.4
-19.1
38.1
-25.9
52.5
-30.2
19.9
-7.0
9.7
98.2
17.1
3.9
30.3
14.2
33.0
-2.2
1.2
-6.8
49.3
18.2
-36.5
74.1
-2.0
Technology
-2.2
30.8
40.3
72.0
-4.4
33.3
-50.1
55.0
6.9
-1.1
20.7
21.8
10.0
2.4
-13.0
7.2
43.5
98.8
127.6
5.3
-53.8
49.7
8.1
-34.9
74.5
12.9
TelecomS
vcs
9.2
19.3
-16
.4
-1.6
-9.8
7.0
-20.8
46.4
-5.1
-19.8
24.0
24.2
44.7
13.1
26.0
19.8
1.5
34.3
104.7
-29.2
-44.7
19.8
20.2
-28.0
15.3
12.6
Transports
7.8
45.6
-1.
2
33.8
-36.8
32.4
-36.9
65.2
-12.9
92.7
12.6
24.5
44.6
20.2
-6.1
59.2
0.4
55.0
39.6
-6.4
-21.6
64.4
20.1
-22.4
54.9
2.0
Utilities
29.2
20.1
-12
.2
0.7
-11.2
-1.9
-42.5
57.6
-9.4
16.5
4.4
25.2
37.8
-9.6
16.5
16.4
-10.7
25.4
30.3
32.2
-54.7
44.8
31.8
-20.7
7.7
10.5
S&P500
Y/Y(%)
PartiesControllingOfficea
ndYear/YearS&P500Performance:1961-2012
Obama
Bush
Carter
Reagan
Reagan
Bush
Clinton
Clinton
JFK/LBJ
Jo
hnson
Nixon
Nixon/Ford
Bush
-600
60
'61
'65
'69
'73
'77
'81
'85
'89
'93
'97
'01
'05
'09
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vestmentGroup
Washington
As noted earlier, the fiscal cliff provides a perfect example of how Washington is playing a lar-
ger role in the market and broader economy than nearly any other variable. To illustrate this,we wanted to focus on the NFIB Small Business Optimism, which was released in mid-
December. In that report, the headline reading fell from 93.1 down to 87.5 for a decline of
6%. Since the NFIB began releasing the results of this survey on a monthly basis in 1986, there
has never been a larger monthly drop. The only other time the index saw a larger decline was
back in April 1980 when the index saw a 13% drop from its January 1980 reading three months
prior. As shown in the chart below, in the nearly forty years that this index has been in exis-
tence, the only three prior periods where the index was below 90 was in 1974, 1980, and dur-
ing the Financial Crisis. Furthermore, all of these periods occurred during recessions.
In each months NFIB survey, small business owners are
asked what the single most important problem they
face is. In this months survey, Poor Sales and Taxes
were tied at the top of the list with 23%. Third on the
list, though, at 18%, was Government Requirements
and Red Tape. The impact of Hurricane Sandy has been
cited as a reason for Poor Sales as the number one
problem, but the real standout in this table is Taxes and
Govt Requirements. Combined, these two Washington
centered problems account for 41% of the total responses. At current levels, the combined
reading of Taxes and Government Requirements is at multi-year highs.
Ever since the election, we have been hearing about the potential what if negative scenarios
of going over the fiscal cliff. Based on the large decline in the Michigan Confidence Expecta-
tions Index earlier in December as well as Decembers record monthly decline in the NFIB
Small Business Optimism Index, those what ifs may already be what is, and they illustrate that
right now, rather than solving problems, Washington is the problem.
NFIB Small Business Optimism Index: 1974 - 2012
80
85
90
95
100
105
110
'74 '79 '84 '89 '94 '99 '04 '09
-6%
Problem Percent
Poor Sales 23
Taxes 23
Govt Requirements & Red Tape 18
Cost/Availability of Insurance 7
Inflation 6
Quality of Labor 6
Competition From Big Businesses 5
Other 5
Cost of Labor 4
Fin & Interest Rates 3
NFIB Single Most Important Problem
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vestmentGroup
Washington
Decembers release of the final Michigan Confidence report provides evidence of how the fis-
cal cliff is impacting not only business behavior but also the actions of individuals. Decembersrelease of the final confidence reading for December showed considerable weakness. Not
only was the headline number worse than expected, but the expectations component declined
even more.
Decembers 13.8% decline in the expectations components of the Michigan Confidence report
ranks as the third steepest one month decline for the index since at least 1979. If you are
looking for any indication of whether or not the Fiscal Cliff negotiations are having (or willhave) an impact on the economy, the expectations component illustrates that consumers are
not very optimistic that there will be a smooth process in reaching a deal.
While negative sentiment may be considered a good
contrary indicator, history shows that large drops in
the expectations component of the Michigan Confi-
dence report have been followed by weaker than aver-
age equity market returns. After the nine prior periods
where expectations dropped by more than ten per-
centage points, the S&P 500 has averaged a decline of0.4% over the next three months, and then gains of
just 1.6% and 4.3% over the next six months and one
year, respectively. In terms of the frequency of posi-
tive returns, over the next one and three months, the
S&P 500 has only been positive 44.6% of the time,
while the S&P 500 has been up two-thirds of the time one year later.
Michigan Confidence: 2000 - 2012
72.9
50
60
70
80
90
100
110
120
'00 '02 '04 '06 '08 '10 '12
Mi chi gan Confi de nce (Current Condi ti ons): 200 0 - 2 012 Mic hi gan Confi de nc e (Expec tions): 20 00 - 20 12
87
50
60
70
80
90
100
110
120
130
'00 '02 '04 '06 '08 '10 '12
63.8
40
50
60
70
80
90
100
110
'00 '02 '04 '06 '08 '10 '12
Date Decl ine 3 Months 6 Months 1 Year
12/31/80 -16.5 0.6 -4.4 -9.7
8/31/90 -14.4 -0.1 14.9 22.6
12/31/12 -13.8
3/31/11 -13.7 -0.4 -12.5 6.2
9/30/05 -13.6 1.6 5.4 8.7
9/30/01 -11.7 11.5 10.2 -21.72/29/04 -11.6 -2.1 -3.2 5.1
12/31/00 -10.9 -12.1 -7.3 -13.0
3/31/80 -10.6 11.9 21.0 33.2
10/31/08 -10.2 -14.7 -9.4 7.0
Average 1.4 3.0 3.9
% Positive 44.4 44.4 66.7
S&P 500 Performance (%)
Large Drops in Consumer Expectations
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SeasonalityIndices, Sectors, and Commodities
As we do each year, in this section we highlight the typical seasonal patterns for the S&P 500
(large cap), S&P 400 (mid cap), and Russell 2000 (small caps). We have also calculated the av-erage monthly returns for the ten S&P 500 sectors (and DJ Transports) and some major com-
modities. For each index, we provide a graph of the average pattern since 1980, the average
change over the prior five years (20072011), and 2012. Below each chart we also include
the average performance during each month.
The table below summarizes the average monthly returns since 1980 for each of the indices/
sectors/commodities on the following pages. For each category, green shading highlights the
month of the year which has historically been the best, while red shading indicates the month
of the year which has traditionally been the worst. Using the S&P 500 as an example, April has
been the indexs best month since 1980 with an average return of 1.78%, while September has
been the worst with an average return of 0.82%.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
S&P 500 0.97 -0.04 0.98 1.78 1.13 0.00 0.56 0.05 -0.82 1.16 1.52 1.63
Mid Caps (since 1981) 0.63 1.09 1.79 1.94 1.59 0.02 -0.07 0.39 -0.68 0.38 1.66 3.07
Russell 2000 1.45 1.12 0.97 1.90 1.61 0.18 -0.60 0.03 -0.57 -0.22 1.60 2.69
Consumer Discretionary 0.96 1.55 2.80 2.25 2.39 0.09 -0.50 -0.20 -0.95 0.80 1.98 0.92
Consumer Staples -0.74 0.78 1.49 1.17 2.18 0.64 0.58 0.80 -0.04 2.10 1.85 1.52
Energy 0.19 1.18 1.97 3.13 1.23 -0.48 0.69 0.46 -0.15 0.52 0.68 1.49
Financials 0.29 0.03 1.91 2.86 1.57 -0.72 -0.18 0.10 -0.88 0.40 1.24 1.90
Health Care 0.99 -0.12 0.78 1.63 1.54 1.06 0.19 0.52 0.39 1.17 2.25 1.68
Industrials 0.60 0.24 1.57 2.51 0.99 -0.34 0.57 -0.25 -0.99 0.47 1.92 2.33
Materials -0.12 1.71 1.74 2.80 1.07 -0.67 0.40 0.35 -2.69 -0.06 2.42 2.0