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7/30/2019 Lane Asset Management Stock Market Commentary for December 2012
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Economic and Market Recap
November was all about the election results
and the fiscal cliff. Interestingly, despite vola-
tility, November finished nearly flat for the
U.S. and emerging markets while Europe had a
strong recovery. The first week of December,
ending with a positive jobs report in the U.S.,
nevertheless did little for U.S. stocks.
Regarding the election results, the biggest im-
pact seemed on income-oriented sectors
(utilities, financials, and preferred and dividend
stock funds). The thought here was that the
likelihood of higher taxes on dividends would
depress their value to investors resulting in
higher yielding securities. It’s an open ques-
tion how long this “adjustment” will last as
some sectors recovered quickly (e.g., finan-
cials) and others have not (e.g. utilities). A
study by Wells Fargo, citing a study by the
Federal Reserve Board in 2005, found that the
long run impact of tax law changes was short-
lived.
A second impact of the election was reaction
to the expectation of higher taxes on long
term capital gains. There is good evidence
that selling pressure depressed prices, espe-
cially in the last few weeks. As can be seen in
the chart below, much of this selling seems to
have dissipated as investors found alternative
(often equivalent) investments.
Stock Market CommentaryDecember 9, 2012
Lane Asset Management
This is my favorite time
of the year, a time for
family, friends and great
food. It’s also a time for
me to be thankful —
thankful for the health
and happiness we enjoy.
I am also thankful for the
indulgence of my readers
who are kind enough to
read my Commentaries
and offer helpful sugges-
tions and their own in-
sights.
But, this is not a great
time for millions who are
un – or underemployed,
who are hungry, or who
are homeless (although
knowing a few people in
this situation, it’s amaz-
ing how well they keep
their spirits up).
So, this is a time to be
thankful, but it’s also a
time to do whatever we
can to share our good
fortune with those less
fortunate. Talk about
return on investment!
Happy holidays to all.
The third significant immediate impact of the elec-
tion has been concern over the fiscal cliff. Here,
too, I think the issue may have run its course as in-
vestors seem to expect a settlement to have little
impact on economic growth (which we can all hope
for). That’s my expectation, too, though I doubt
we’ve seen the end of volatility.
Investment Outlook
Last month I indicated that this may not be the
best time to take on significant investment risk and
I’m sticking to that story. I believe the structural
problems in the developed economies are far from
resolved and will take more time to work through
the system. However, that doesn’t mean I wouldavoid equities and it doesn’t mean that there won’t
be decent opportunities for gains in 2013 (more on
that in my annual Fearless Forecast next month).
As shown on the following pages, both large cap eq-
uities and investment grade corporate bonds have
been performing well since the depths of the fiscal
crisis. While I think gains will be more muted in
the near future, I’ve read well-regarded analysts
who believe next year could be as strong as this
year. Therefore, my recommendation at thispoint, with much depending on one’s risk toler-
ance, is to stay the course with high grade equities
and corporate bonds. There are a few other areas
to be opportunistic, like municipal bonds, and we’ll
discuss those in greater length next month.
The charts on this and the following pages use exchange-traded funds (ETFs) rather than market indexes since indexes cannot be invested in directly. The ETFs
are chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity . Prospectuses for these ETFs can
be found with an internet search on their symbol. Past performance is no guarantee of future results.
7/30/2019 Lane Asset Management Stock Market Commentary for December 2012
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SPY is an exchange-traded fund designed to match the experience of the S&P 500 index adjusted for dividend reinvestment. Its prospectus can be found online. Past performance is no
Page 2Lane Asset Management
Following a hiccup on the heel of the election, SPY has not only recovered to its pre-election level for the
time being, but it has turned the corner on important momentum indicators as shown in the bottom of the
chart. An optimistic technical view would note the similarity of the moving averages and momentum indica-
tors (in fact, the entire pattern over the last three months) to the pattern displayed last May, June and July
and conclude there is opportunity to the upside. If that’s all we had to go on, I would change my outlook to
being more optimistic. But there’s also the fundamental reality of intractable debt and employment issues in the U.S. and Europe. It also needs
to be noted that a wide swath of economic indicators are far from robust. While my preference for fiscal policy is for stimulus paid for through
revenue increases and elimination of outdated or inefficient current spending coupled with comprehensive tax reform in the U.S. (yes, I think
“entitlements” also need to be addressed, but that’s another story), I’m not confident the political dynamics will take us there anytime soon.
Therefore, I think the best course is to remain cautious overall and to balance equity exposure against tolerance for risk.
S&P 500
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VEU is an exchange-traded fund designed to match the experience of the FTSE All-world (ex U.S.) Index. Its prospectus can be found online. Past performance is no guarantee of future
results.
Page 3Lane Asset Manageme nt
Defying every expectation, international equities have continued to climb, overcoming the negative mo-
mentum shown at the bottom of the chart. Where last month I attributed this more to selected coun-
tries in Asia, recently even certain countries in Europe are outperforming the broader international index
(like Germany and Belgium). At this point, based on the chart below, there is every good reason to go
“green light” on selected international stocks. On the other hand, the reason I remain cautious is that
parts of Europe (Spain, Italy and Portugal, for example) as well other parts of the world (Brazil, for exam-
ple) continue to show relative weakness compared to the broader index. Moreover, the continuing unemployment and sovereign debt issues in
Europe remain quite worrisome. Therefore, the overall message is that while the broad international index is attractive at this time, investors
may be better served focusing on individual country selection.
All-world (ex U.S.)
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SPY, VEU, and LQD are exchange-traded funds designed to match the experience of the S&P 500, (with dividends), the FTSE All-world (ex US) index, and the iBoxx Investment Grade
Corporate Bond Index, respectively. Their prospectuses can be found online. Past performance is no guarantee of future results.
Page 4Lane Asset Manageme nt
Asset allocation is the mechanism investors use to enhance gains and reduce volatility over the long term. Commonly, investors
choose an allocation that reflects their risk tolerance and reallocate at prescribed times, say, semi-annually, or when the actual per-
centage allocation deviates from the longer-term strategic plan. One useful tool I’ve found for establishing and revising asset allo-
cation comes from observing the relative performance of major asset sectors (and within sectors, as well). The charts below show
the relative performance of the S&P 500 (SPY) to an investment grade corporate bond index (LQD) on the left, and SPY to a Vanguard All-
world (ex U.S.) index fund (VEU) on the right.
As shown on the left below, U.S. equities are turning the corner on investment grade corporate bonds — an interesting outcome following the
election, anticipation of which was showing up in late October. Since the reversal is relatively recent, increasing equity exposure should be done
carefully and spread over time. On the right, international equities have continued their outperformance relative to U.S. equities. It’s hard to
tell if this is a technical recovery coming off the prior months of underperformance or an indication of fundamental strength (something I have
a hard time believing for Europe). While the trend is clearly favoring international, the strong negative reading on the momentum indicators at
the bottom suggest a nearing potential for reversal. Bottom line: given market uncertainty, a balanced approach may be best at this time.
Asset Allocation and Relative Performance
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AGG is an exchange-traded fund (ETF) designed to match the experience of the Barclays Capital U.S. Aggregate Bond Index. LQD is an ETF designed to match the experience of the iBoxx
Investment Grade Corporate Bond Index. Prospectuses can be found online. Past performance is no guarantee of future results.
Page 5Lane Asset Manageme nt
LQD represents the total return (capital gains and interest income) for investment grade corporate bonds; AGG
represents the total return of a composite of domestic government and investment grade corporate bonds and
similar instruments (think of it as LQD but with government bonds). The chart on the right shows the relative
performance of LQD to AGG which, except for brief periods, has been positive for most of the last two years, sup-
porting the thesis of investment grade corporate bonds over government bonds.
No change from last month: From a technical perspective, it’s hard not to like investment grade corporate bonds. Not only have the last two
years been extraordinary, but this performance goes back to the early 80’s when interest rates were at their highest. Yes, certainly a large part
of the past performance can be attributed to the decline in interest rates and this is a phenomenon with a limited future, we can all agree. But
with the index holding bonds of various durations, and with the Fed determined to hold short term rates near zero until mid-2015, the impact
of rising rates (if occurring slowly) is likely to be more muted than many people might expect. In March and August, I was concerned about the
extent to which LQD had gotten above its trend line which also showed up in the relative performance chart. In both cases, that problem was
subsequently corrected and performance is back on trend. The picture looks similar at the end of September and some deterioration should
not come as too much of a surprise. That said, investment grade corporate bonds continue to be attractive in an unsettled environment.
U.S. Aggregate and Corporate Bonds
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Page 6Lane Asset Manageme nt
The chart below shows the last 12-month performance of the indicated ETFs, the same ones that are on page 1. The performance speaks for it-
self, but a few observations may be useful:
Following the two-month slide leading up to the election, the S&P 500 (with dividends included seems to be recovering. I would l ike to see
this continue for at least another month before making a much large commitment to U.S. equities. Gold (GLD) slipped in October, seemed like it might be bouncing back, but has languished for the last six weeks. I still don’t see enough evi-
dence to make a major commitment to gold at this time.
Oil (DBO) continues to slip as the world’s economies slow down and are confronted with even slower growth prospects.
Both Europe (IEV) and Emerging Markets (EEM) have had parallel performance and both seem to be on the mend over the past several
months. Europe has shown surprising strength and is now at a 12-month high.
Investment grade corporate bonds continue their no-drama upward trend and are very close in performance to equities in the U.S. and
Europe for the year.
12-Month Performance
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Edward Lane is a CERTIFIED FINANCIAL PLANNER™. Lane Asset Manage-
ment is a Registered Investment Advisor with the States of NY, CT and
NJ. Advisory services are only offered to clients or prospective clients
where Lane Asset Management and its representatives are properly li-
censed or exempted. No advice may be rendered by Lane Asset Man-
agement unless a client service agreement is in place.
Investing involves risk including loss of principal . Investing in interna-
tional and emerging markets may entail additional risks such as currency
fluctuation and political instability. Investing in small-cap stocks includes
specific risks such as greater volatility and potentially less liquidity.
Small-cap stocks may be subject to higher degree of risk than more es-
tablished companies’ securities. The illiquidity of the small-cap market
may adversely affect the value of these investments.
Investors should consider the investment objectives, risks, and charges
and expenses of mutual funds and exchange-traded funds carefully for a
full background on the possibility that a more suitable securities trans-
action may exist. The prospectus contains this and other information. A
prospectus for all funds is available from Lane Asset Management or
your financial advisor and should be read carefully before investing.
Note that indexes cannot be invested in directly and their performance
may or may not correspond to securities intended to represent these
sectors.
Investors should carefully review their financial situation, making sure
their cash flow needs for the next 3-5 years are secure with a margin
for error. Beyond that, the degree of risk taken in a portfolio should be
commensurate with one’s overall risk tolerance and financial objectives.
The charts and comments are only the author’s view of market activity
and aren’t recommendations to buy or sell any security. Market sectors
Page 7 Lane Asset Management
Disclosures
Periodically, I will prepare a Commentary focusing on a specific investment issue.
Please let me know if there is one of interest to you. As always, I appreciate your feed-
back and look forward to addressing any quest ions you may have. You can find me at :
www.LaneAssetManagement.com
Edward.Lane@LaneAssetManagement.com
Edward Lane, CFP®
Lane Asset Management
Stone Ridge, NY
Reprints and quotations are encouraged with attribution.
and related exchanged-traded and closed-end funds are selected based on his opinion
as to their usefulness in providing the viewer a comprehensive summary of market
conditions for the featured period. Chart annotations aren’t predictive of any future
market action rather they only demonstrate the author’s opinion as to a range of pos-
sibilities going forward. All material presented herein is believed to be reliable but its
accuracy cannot be guaranteed. The information contained herein (including historical
prices or values) has been obtained from sources that Lane Asset Management (LAM)considers to be reliable; however, LAM makes no representation as to, or accepts any
responsibility or liability for, the accuracy or completeness of the information con-
tained herein or any decision made or action taken by you or any third party in reli-
ance upon the data. Some results are derived using historical estimations from available
data. Investment recommendations may change without notice and readers are urged
to check with tax advisors before making any investment decisions. Opinions ex-
pressed in these reports may change without prior notice. This memorandum is based
on information available to the public. No representation is made that it is accurate or
complete. This memorandum is not an offer to buy or sell or a solicitation of an offer
to buy or sell the securities mentioned. The investments discussed or recommended in
this report may be unsuitable for investors depending on their specific investment ob-
jectives and financial position. The price or value of the investments to which this re-
port relates, either directly or indirectly, may fall or rise against the interest of inves-
tors. All prices and yields contained in this report are subject to change without notice.
This information is intended for illustrative purposes only. PAST PERFORMANCE
DOES NOT GUARANTEE FUTURE RESULTS.
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