The Top 3 Mind-Boggling Trends of the New Year and What to Do About Them

Spending a lot of time on radio and tv affords me the ability to not only get my thoughts and messages out, but more importantly, hear the musings and predictions of others who, like me, are trying to be the most informed and engaging personalities when it comes to the investment world.  That’s why as I write this January update, I’m rather amazed about the strength of the equity markets around the globe and some of the new trends that have emerged out of nowhere that might be pointing to something different happening in 2012 that many originally thought would not be possible.  Let’s take a look at several of the early “trends” that may make investors “friends” with their portfolios again in 2012…

1.) One of the most shocking developments this year has been the movement in financial stocks.  Not just in the U.S., but around the globe.  Remember those banks in Europe that were/are on the verge of closing because they are saddled with lousy debt that is likely to, in some fashion, proceed to default status early in 2012?  Those bad banks that I bashed relentlessly in the media, and in some cases bet against (via a short position) in the fall of 2011?  They are amongst your early year 2012 top performers.  Their U.S. counterparts are not far behind, either.  As I write this, the XLF – my preferred ETF for following the domestic financial sector as a whole, is up over 10% YTD!  This is with all the festering problems in housing and with real wages flat to negative when adjusted for inflation.   And that is not the end of the U.S. banks’ problems, they have, whether they admit it or not, a good deal of exposure to European debt and bank debt over there that will rattle balance sheets should the principal lent not fully come home upon the debt instrument maturation.  I continue to believe that this is a fair time, if you find yourself exposed to financial stocks, to liquidate the position.

2.) Another odd development this year has been the very yields on the debt that is issued by European countries.  In no sense of what I can determine has anything improved in Europe, either fiscally or economically, yet yields (the price that investors demand to hold the underlying instrument) have done nothing but head down in 2012 thus far.  This is essentially a vote of confidence by investors that they feel more comfortable with a particular country’s debt – whether it would be Greece, Italy, Spain or Portugal.  Who on Earth is buying into this is anybody’s guess, but the latest numbers out of Europe from Germany alone show that many economies over there are heading towards or already in contraction mode and that will have pervasive (negative) effects on the ability of these countries to pay back promises they made to investors when they bought their bonds.  Ironically, this tumult will only help our U.S. treasury bonds as more downgrades hit the European countries and investment policy dictates that monies flow to solvent, high rated nations like that of the United States.  Seeing our Treasury yields bounce all the way back up over 2.1% in February is completely perplexing since money at this point should be seeking higher ground in the bond food chain and that is none other than U.S. debt.  Corporate and high yield debt has been showing this movement, but the government side has not.  My best guess is that this is just a matter of time until rates here on the 10-year Treasury test the lows from last fall.

3.) Lastly, it is worth noting how well international stocks have performed versus “safe” sectors in the U.S. so far this year.  By “safe” of course I mean the sectors that tend to be less volatile and less subject to big drawdown in times of peril, like consumer staples, pharmaceuticals and utilities.  Overseas stocks have been star performers so far this year, with emerging markets up well over 10%.  That’s a huge move that only recovers what many of them lost in 2011, but it is still worth noting that the volatility, at least overseas, is continuing.  This tells me that markets there are not comfortable with current international valuations and current price is not what one could call “fair value.” 

In closing I want to caution everyone to feel apt to get excited to the start of the year, but not overconfident as the pace of this market move is likely to slow and at times show signs of turning over to the downside. I continue to like utilities (funny how everyone jumped off the utilities bandwagon early in January) because they are falling out of mainstream favor quickly due to fears of rising interest rates that are completely unfounded.  Consumer staples companies are facing some pricing pressure due to rising input costs but are managing the supply chains well and do have some room for pricing power.   Pharma has been pretty hot the last few months, outperforming the S&P, which is somewhat of a rare upside feat, and that likely means we will see pharma behave similarly on the downside when the next drawdown comes in the major averages.  However, the main point is here is that we do remain a drug-addicted, over prescribed society that is going to sustain the sector’s product demand for a long time. 

Scott D. Martin, President and CEO, Accent Asset Management, Inc. A frequent speaker and lecturer, Mr. Martin has been featured in print and broadcast media such as The Wall Street Journal, Investor’s Business Daily, Bloomberg, and CNBC.  He is currently a contributor to Fox Business Network and is a former columnist with TheStreet.com. 

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