Year End Summary

As we begin a new year, I would first like to look back at 2012 and the major events that shaped the investment world during the last 12 months. Four years after the credit crisis of 2008, we find ourselves still reducing debt loads and working out solutions to the various economic problems. De-leveraging is continuing and the economic policy makers are continuing to support this transition by keeping interest rates low and providing additional stimulus.

For the most part, market indicators have showed decent gains during 2012 with the job and housing numbers (the two most critical reports) both improving over the course of the year. Unemployment rates started at 8.3% in 2012 and closed out November at 7.7%. This continues the steady downward trend after reaching a height of 10% back in October 2009. New housing starts in October were up a whopping 42% from the year before! These continuously improving reports show a gradual market recovery that few can dispute.

The majority of the economic upswings that we’ve seen over the past few years have been driven by central bank interventions with stimulus. The US Fed announced the latest round, dubbed QE3, in the fall of last year. What really sets QE3 apart is that it is open-ended and has no expiry date. This latest round of stimulus will continue until the country’s employment rate improves considerably and the low interest rate policies are planned to stay in effect “at least as long” as unemployment remains above 6.5% and inflation is not more than 2.5%. Current projections for the first interest rate hike in the US are the second half of 2015. It’s hard to say for sure but it’s a good bet that here in Canada, we will see our first rate increase well before that.

In line with my sad prediction from the recent article on the Fiscal Cliff, the US policymakers waited until the last moment to come to an agreement to avoid the fiscal cliff. In reality, since the vote wasn’t completed until January 1st, the US actually went over the cliff and then quickly climbed back up. The deal that was reached will reinstate and make permanent much of the Bush-era tax cuts for individuals earning up to $400K and married couples earning up to $450K. Top earners will see their marginal tax rates rise to 39.6% from 35% last year as well as increased taxation on capital gains and dividends. The biggest change is that a 2% social security payroll tax cut will disappear permanently which means a full 77% of US households will in fact pay higher taxes in 2013. To summarize, the fiscal cliff was largely avoided as expected and despite several group’s best efforts to drum up some fear, the event has no real impact on the overall markets.

As we enter 2013, the job and housing number continue to improve and the clarity of the future tax situation will allow corporations to create and implement their expansion plans. However, until the final outcome on the US budget is decided, many companies may hold off for a few months yet. The next circus known as the “debt ceiling debate” is just around the corner so you can expect some volatility to continue in the coming months. As always, a sound investment plan will continue to help navigate these very interesting times..

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