November was an emotional month for investors. There was pre-election anxiety followed by post-election panic. By month end, cooler fundamental heads prevailed and the markets ended November basically where they started.
The monthly stock market returns masked the wild day to day roller coaster ride. The S&P 500 gained 0.58% while the DJIA was down 0.54%. Small capitalization stocks as measured by the NASDAQ Composite rose 1.37%, the Russell Mid-Capitalization group did a little better at 1.64%, and international stocks generated 2.42% gain as measured by MSCI EAFE Index. The year-to- date equity returns are all showing returns in the mid-teens, an impressive year by any measure.
The bond market appears frozen in time as U.S. Treasury yields for the month were unchanged to slightly lower, thus producing positive returns across the board. The Barclays Aggregate Bond Index, an index of all taxable U.S. investment grade rated bonds increased 0.14% in November. Long U.S. Treasuries were the best performing investment grade sector rising 1.33%. High yield corporate bonds had another impressive month returning 0.80% and are keeping pace with the S&P 500 returns this year. The monthly fixed income sector winner was municipal bonds as the fiscal cliff and the likelihood of higher income taxes gave this sector a boost jumping 1.65%.
The media will continue to over use the buzzwords to sell newspapers and advertising time, but the long-term investor needs to see through the hype and reflect on the valuation buzzwords that drive price. Let’s revisit terms like: earnings, earnings growth, dividends, dividend growth, price earnings ratios, profit margins, revenue growth, earnings expectations, inflation, and real returns to properly evaluate the current markets. When we look at the world stock markets in these terms, stocks appear slightly undervalued and our 2013 expectations are for high single digit returns and we favor international to domestic. Bonds are fully priced at these interest rate levels and investor expectations for 2013 should be to earn the coupon. The capital appreciation trade in bonds is now the rear view mirror and investors need to adapt to low rates with little opportunity for additional price gains.
The best way to deal with concerns of the fiscal cliff, the debt ceiling and any other crisis to come along next year is to take a long-term investment view and oversee your personal financial plan from 10,000 feet.