Fourth Quarter Economic Update


While the S&P 500 had its first negative fourth quarter in four years, it didn’t
stop the index from having a great 2012. The NASDAQ and Dow also lost ground
for the quarter, but the losses could have been worse – Europe was for once
relatively free of alarm, Wall Street seemed to take fiscal cliff fears in
stride, and key indicators held up even after a massive storm delivered a punch
to the economy on the east coast. The Fed let investors know exactly where it
stood when it came to raising rates. Our real estate sector showed real
improvement. Congress added a whole bunch of drama – a deal was struck right at
the edge of the fiscal cliff, one which provided a partial solution to the
dilemma (as well as higher taxes).1

Congress technically missed the year-end deadline for addressing the fiscal cliff issue,
but it managed a fix on New Year’s Day – and the resulting tax law changes were
major. A repeal of the 2% payroll tax cut meant higher taxes for working
Americans across the board in 2013. The top marginal tax rate was reset to
39.6%, and the top estate tax rate was hiked to 40% while the individual
exemption fell slightly to $5 million. The bill had a considerable upside: the
Bush-era tax cuts were made permanent for 98% of Americans, unemployment
insurance was extended for another year, and the idea of taxing dividends as ordinary
income was jettisoned (the legislation capped both dividend and capital gains
taxes at 20%).2

The Federal Reserve told the country exactly when it would make a move on interest
rates. It said it would do so when the unemployment rate hit 6.5% or inflation reached
2.5%. Operation Twist expired at the end of the quarter, but the central bank
said it would buy $45 billion in longer-term Treasuries come January. Reports
out of Washington hinted that Treasury Secretary Timothy Geithner and Fed
Chairman Ben Bernanke were considering leaving their jobs by 2014 or earlier;
in fact, it looked as if Geithner would resign in January.3,4,5,6


By December, the jobless rate had declined to 7.8%, down 0.5% in five months; the
long-term unemployed comprised 39.1% of jobless Americans, down from 44.3% two
years before. Good news, yet the looming fiscal cliff stressed households. The
Conference Board’s consumer confidence poll and the University of Michigan’s
consumer sentiment survey saw big drops in December after reaching multiyear
highs in November, respectively falling 6.4% and 9.8%.6,7,8,9
As for consumer spending, it was up 0.4% in November after a 0.1% October retreat.
Consumer incomes rose 0.6% in November, the best advance in 11 months. In
related news, the Bureau of Economic Analysis put the final estimate of Q3 GDP
at 3.1%, a sea change from the initial 2.0% assessment. Retail sales decreased 0.3%
in October, then rebounded 0.3% in November even with the effects from
Superstorm Sandy (gasoline sales plunged 4% while automakers reported the best
month of new car sales they had seen in four years).9,10,11

Consumer inflation was not yet a factor, even as QE3 progressed. In fact, the CPI
declined 0.3% in November and only rose 0.1% in October. By November, yearly
consumer inflation was just 1.8% (the annualized core CPI increase was 1.9%). Producer
prices fell 0.2% in October and 0.8% in November after rising 1.1% in

The Institute for Supply Management’s manufacturing PMI again flirted with
contraction territory – it was at 51.7 in October, 49.5 in November and 50.7 in
December. ISM’s service sector PMI was stronger: 54.2 for October, 54.7 in
November and 56.1 for December.13,14


outlook grew brighter for China in late 2012. HSBC’s China PMI topped 50 in
November (the first time that had happened in 13 months), and the International
Monetary Fund forecast 8.2% growth for the PRC in 2013 (2012 was shaping up to
be the poorest year for China’s economy since 1999, with Q3 GDP at just 7.4%).  The IMF projected overall 2013 Asia-Pacific
growth at 6.0% for 2013, which was also its projection for India. While
Australia’s benchmark PMI came in at 44.3 in December, manufacturing gauges in
China, South Korea and Taiwan all surpassed the 50 level.15,16,17

Europe’s four-year-old debt crisis was hardly settling down. Bank lending to companies
declined in the eurozone by 1.8% in both October and November; the European
Commission approved a collective €37 billion rescue package for four key
Spanish banks during the quarter. On the upside, S&P upgraded Greece’s
credit rating to B-. Germany’s unemployment rate hit 6.7% in December. The
Markit PMI for overall EU manufacturing sank below 47 in November and December,
a strong hint that the eurozone recession would extend for a third quarter.18,19

Foreign stock markets saw big gains in Q4 2012. Key Asia Pacific indices did very well,
and the Nikkei 225 led them all with a 17.2% advance. Australia’s All
Ordinaries rose 5.9%, the Hang Seng climbed 8.8%, the Sensex rose 3.6% and the
Shanghai Composite gained 8.9%. The MSCI World Index rose 2.1% for the quarter;
the MSCI Emerging Markets index advanced 5.2%. Momentum also gathered in Europe.
Here are some Q4 gains from that region: CAC 40, 8.5%; IBEX, 6.0%; FTSE 100,
2.7%; STOXX 600, 4.2%. Greece’s ATHEX Composite rose 23% last quarter.17,20,21

Generally speaking, the fourth quarter was rough on the commodities sector. In New York,
silver and gold both dropped 12.6%; platinum fell 7.6%, yet palladium gained 9.8%.
(Gold and silver did respectively advance 7.0% and 8.3% on the year.) The
quarter was not good for some key crops: corn futures lost 7.3%, wheat 13.8%, and
soybeans 11.4%. (However, wheat futures rose 19.2% across 2012 while soybeans
gained 18.4%.) Natural gas futures soared in the quarter en route to a 12.1%
yearly gain; oil’s red Q4 contributed to its 7.1% 2012 descent. The U.S. Dollar
Index ticked down 0.2% in Q4 2012.22,23,24,25

Reporting a 5.9% gain in existing home sales in November, the National Association of
Realtors also said residential resales had increased 14.5% in the past 12
months. October’s Case-Shiller Home Price Index showed a 4.3% annual gain in
home values across 20 cities – the best yearly advance it had seen in 29
months. Building permits for single-family construction were up 25.3% annually
by November, with single-family housing starts up 22.8% in the past year. By November, median new home prices were 3.7%
higher year-over-year; new home sales were down 3.5% in October but up 4.4% a
month later. Pending home sales were up for a third straight month in November,
rising 1.7%.26,27,28
Home loan rates descended in Q4 2012, with a helping hand from QE3. Back on
September 27, interest rates on mortgages averaged as follows, according to
Freddie Mac’s Primary Mortgage Market Survey: 30-year FRMs, 3.40%; 15-year FRMs,
2.73%; 5/1-year ARMs, 2.71%; 1-year ARMs, 2.60%. In the December 27 PMMS, the
averages were: 30-year FRMs, 3.35%; 15-year FRMs, 2.65%; 5/1-year ARMs, 2.70%;
1-year ARMs, 2.56%.29

Note the 6.15% difference in the annual performance of the
Dow and S&P for 2012. The gap hasn’t been that broad since 2002. As a
footnote, the Russell 2000 finished 2012 just 1.8% under its all-time closing
high of 865.29 from April 2011; it rose 14.63% for the year. Another thing
about the Russell 2000: it didn’t lose any ground last quarter. The Dow,
S&P and NASDAQ all beat notable retreats over the past three months. The
Dow ended the year at 13,104.14, the S&P at 1,426.19 and the Nasdaq at 3,019.51.1,30,31

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.

These returns do not include dividends.
Is the worst behind us? Is the wind in our favor? Economists have talked for
months about how the market could have a great 2013, if only a solution could
be found for the fiscal cliff … and Europe’s debt crisis … and the threat
of higher taxes … and so forth. Well, the market spent most of 2012 worrying
about these things and had a good year anyway. Wall Street’s optimism is pretty
entrenched at the moment, and it may be bolstered in Q1 2013 if fundamental
indicators continue to improve and earnings surprise to the upside. The faith
in this bull market has yet to fade.

Reeve Conovers Disclosure:

This material was prepared by MarketingLibrary.Net
Inc., and does not necessarily represent the views of the presenting party, nor
their affiliates. Marketing Library.Net Inc. is not
affiliated with any broker or brokerage firm that may be providing this
information to you. This information should not be construed as investment, tax
or legal advice and may not be relied on for the purpose of avoiding any
Federal tax penalty. This is not a solicitation or recommendation to purchase
or sell any investment or insurance product or service, and should not be
relied upon as such. The Dow Jones Industrial Average is a price-weighted index
of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an
unmanaged, market-weighted index of all over-the-counter common stocks traded
on the National Association of Securities Dealers Automated Quotation System.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities
considered to be representative of the stock market in general. It is not
possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates
two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE
Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange).
NYSE Group is a leading provider of securities listing, trading and market data
products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the
world’s largest physical commodity futures exchange and the preeminent trading
forum for energy and precious metals, with trading conducted through two divisions
– the NYMEX Division, home to the energy, platinum, and palladium markets, and
the COMEX Division, on which all other metals trade. Nikkei 225 (Ticker: ^N225)
is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average
is the most watched index of Asian stocks. The All-Ordinaries Index is the most
quoted benchmark for Australian equities, comprised of common shares from the
Australian Stock Exchange. The Hang Seng Index is a freefloat-adjusted market
capitalization-weighted stock market index that is the main indicator of the
overall market performance in Hong Kong.  BSE Sensex or Bombay Stock Exchange
Sensitivity Index is a value-weighted index composed of 30 stocks that started
January 1, 1986. The SSE Composite Index is an index of all stocks (A and B
shares) that are traded at the Shanghai Stock Exchange. The MSCI World Index is
a free-float weighted equity index that includes developed world markets, and
does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted
market capitalization index consisting of indices in more than 25 emerging
economies. The CAC-40 Index is a narrow-based, modified capitalization-weighted
index of 40 companies listed on the Paris Bourse. The IBEX 35 index is
comprised of the 35 most liquid stocks traded on the Spanish Continuous Market.
The FTSE 100 Index is a share index of the 100 most highly capitalized
companies listed on the London Stock Exchange. The STOXX Europe 600 Index is
derived from the STOXX Europe Total Market Index (TMI) and is a subset of the
STOXX Global 1800 Index. The Athex Composite Share Price Index is a benchmark
index of Greece’s stock market that includes over 30 stocks. The US Dollar
Index measures the performance of the U.S. dollar against a basket of six
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as currency fluctuations, political and economic instability and differences in
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