Investment Update from James C. Baird | Chairman and Founding Principal
January 25, 2012
Dear Valued Clients & Friends:
While none of the world’s major economic problems have been solved since our last communication in October, overall investor sentiment has improved. The CBOE Volatility Index® (VIX®), a key measure of the market’s expectations of near-term volatility, has declined approximately 60% from its August 2011 peak, the recent point at which investor fear was highest. Conversely, the S&P 500 has appreciated more than 20% from its October 2011 lows. We have continued to see a general improvement in many of the more important economic numbers, particularly in the US. This reflects a US economy that wants to continue to progress, yet the same global headwinds remain. For the year 2011, the S&P 500 was up 2.11%, while international stocks declined -12.14%, and emerging markets stocks declined -18.42%. Will 2012 be the year that the US economy finds consistent growth, or will 2012 be the year that uncertainty prevails and middling growth continues?
The European issues, a China slowdown, and their impact on the US economy remain the primary concerns that we face:
• European sovereign debt: It is becoming increasingly likely that European nations will experience recession in 2012. A recent BBC report stated that Germany’s economy may have shrunk by 0.25% in the 4th quarter of 2011. This recession likelihood has been anticipated for some time, as Europe’s Manufacturing Index (PMI) has been contracting since August 2011. We are getting closer to a broad resolution to Europe’s sovereign debt issues, but the indecision and delays may end up pushing Europe, and possibly drag the US, into an avoidable recession. The European Central Bank (ECB), the International Monetary Fund (IMF), the US Treasury, and perhaps other nations will likely be involved with providing a more permanent solution, but it will not be immediate. Even when a broader resolution is reached, Europe will continue to face longer-term issues such as a decline in competitiveness and other demographic disadvantages. This uncertainty will continue to hamper the overall global economy.
• Fears of US slowdown: While the US economy grew less overall in 2011 than some expected, the trend is in the right direction, with the year ending much stronger than expected even just a few months ago. Third quarter 2011 GDP growth came in at 1.8%, which follows first quarter GDP growth of just 0.4%, and second quarter GDP growth of 1.3%. The first estimate of fourth quarter GDP is due on Friday, January 27th and continued improvement from the prior quarter is widely expected. Weekly jobless claims, consumer confidence, housing numbers, and manufacturing numbers have all been improving. The US continues to expand at a slow place.
• China “slowdown”: We write “slowdown” because “slow” growth in China would equate to rapid growth in most of the rest of the world. Slow growth in China equates to about an 8% GDP. The main concerns about the Chinese economy have revolved around their slowing housing market, and too much leverage in their shadow banking sector. Inflationary pressures have been moderating as of late in China, so China should be able to shift to a more accommodative policy going forward which would re-invigorate growth and help to avoid a “hard landing.”