2012 In Review

As we have turned the page of another calendar, we’ll take a look back at 2012 and see how the markets treated investors, our economic progress and the latest news from Washington DC.

Markets:

2012 was a banner year for US stocks as the S&P 500 returned 16.00% including dividends.  The markets started off the year with a bang and then faced significant setbacks in May and November as fears over European financial issues and US government deficits mounted.

Despite already exceedingly low rates, the US bond market had a decently good year with the Barclay’s Aggregate Bond index posting a 4.22% return.

Foreign stocks also had a strong year with the MSCI EAFE benchmark posting a 13.96% annual return after 2011’s loss of -14.82%. Emerging markets were up 14.52% in 2012.

Economy:

Unemployment, while still nagging, improved in 2012.  We entered the year with a rate of 8.5% and the most recent calculation is 7.7%.  Nothing to be excited about, but a move in the right direction as we continue to work out of the most significant recession in decades.   GDP growth remains positive at 2.6% (annualized) at the end of the third quarter, slightly below the long-term historical average.

Inflation is very much under control despite doomsday predictions of runaway prices.  The most recent annualized increase was just 1.8%.  While certain commodities, including food prices, have seen larger increases, energy prices have abated and consumer purchasing power remains under control. Falling gasoline prices have contributed to lower inflation rates and gave consumers extra cash just in time for the holiday season.

Historically there have been two major contributors to post-recession growth: housing and automobile sales.  As 2012 progressed, the residential real estate market began to show strong signs of life. Home prices throughout the country have improved as the Case-Shiller index for the 20 largest cities in the United States grew 4.3% for the twelve months that ended in October.  Locally, Denver real estate prices were stronger than the national average with a gain of 6.9%.  Housing starts, an indicator of new residential construction, saw a strong comeback in late 2012 as seen below.

Auto sales surged in 2012 with year-to-date figures through November showing a 19.1% jump in car sales and a 8.8% increase in truck sales compared to 2011.  The combination of this improvement and the recovering housing market is evidence of our recovery gathering strength.

Washington:

After the re-election of President Obama, the single biggest news out of Washington at the end of 2012 (really early 2013!) was a resolution to what became known as the “fiscal cliff.”  The combination of the expiration of the Bush tax cuts, new mandatory spending cuts, and the expiration of the temporary 2% reduction in payroll (FICA) taxes were all scheduled for January 1st, 2013. Practically every economist agreed that the full impact of these changes would push the US back into a recession when growth was just beginning to return.

The weekend of the New Year celebration was abuzz with activity in DC as Democrats and Republicans struggled to come to agreement on a solution to the crisis. Finally on December 31st the Senate passed a resolution by an overwhelming majority vote.  After another day of back and forth and much political grandstanding, the house put the Senate bill for a straight up-or-down vote and it passed.  The most significant news from this resolution is that the changes to income tax rates, the estate tax and a patch to the Alternative Minimum Tax have been made permanent and will not expire at a predetermined point in the future. Below is a brief summary of these changes:

  •  Bush-era tax rates have been made permanent for all earners with income under $450,000 (married filing jointly);
  • 15% long-term capital gain rates and qualified dividend income rates are permanent for earners under $450,000 MFJ;
  • Taxpayers with income over $450,000 will see rates rise to 39.6% and capital gain and qualified dividend rates will rise to 20%.  With the addition of the 3.8% surtax from the Affordable Care Act, rates for the highest bracket will effectively rise to 23.8% for investment income;
  • The estate tax exemption will be $5,120,000 with a permanent inflation adjustment going forward.  The rate will rise from 35% to 40% for taxable estates;
  • “Portability” of a married couple’s estate tax exemption is made permanent, potentially eliminating the need for “bypass” trust planning for many families;
  • High earning taxpayers will see a return of phaseouts of personal exemptions and itemized deductions similar to rules in place in 2009. These thresholds are $300,000 for married filing jointly, after which deductions and exemptions are reduced by 3% of the income over the threshold;
The full text of the legislation is here (in case you have trouble sleeping): http://www.govtrack.us/congress/bills/112/hr8/text

This legislation provides the economy and markets with something we have lacked for several years: some certainty, which allows for long-term planning. Difficult decisions lie ahead for politicians as the mandatory budget cuts (aka sequester) have only been pushed back two months, and the federal government is projected to hit the debt ceiling in early February, which requires a congressional vote to raise. Time will tell what 2013 brings for Washington, but we will remind investors that the future is unpredictable and the most successful course is to stay focused on long-term goals.

 

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