ope accounts for a large portion of global demand,
especially for export-dependent China. Germany’s economy
is the fourth largest in the world, followed closely by France.
Together, the combined economies of all 17 euro-area
countries are nearly equal to that of the US, in GDP terms.
During the rst half of 2012, China’s economy showed signs
of weakening, with growth expected to fall to around 8%—a
signicant drop from its historical growth rate. China
exports heavily to the euro zone. e crisis also threatened
to reduce China’s exports to poorer emerging economies
in Africa and Latin America, where nations rely heavily on
European banks for trade nancing. In the latter part of
2012, concerns over slowing growth in emerging markets
had begun to ease as economies appeared to bottom out.
Stabilizing Actions by Central Banks
Many investors did not appear to anticipate the degree to
which markets would positively respond to central bank
actions. Many analysts credit the US and European central
banks with boosting investor condence in both markets,
and in the case of the European Union, helping avert a
euro breakup. e injection of liquidity into the respective
economies also helped mute volatility between currencies.
In September and October, the Bank of Japan announced
measures to provide monetary stimulus through 2013 in
response to slowing economic activity.
A Search for Higher Yield
Interest rates dropped slightly to near-record lows during the
year. e rate move drove up bond market prices and total
returns. But with the Fed and other central banks committing
to keeping the nancial markets liquid for an indenite
period, some investors found appeal in riskier xed income
securities, such as junk bonds, emerging market debt, and
collateralized loan obligations that oer higher yields.
Wall Street responded to rising demand with new
oerings. Junk bond issuance hit a record $350 billion in
2012, with many of the issues carrying fewer protections
for bondholders. Investors also ocked to high-yielding
alternative investments, such as energy partnerships
and venture capital funds. Observers warned that the
combination of unchecked risk appetites, low interest rates,
and high bond prices may present danger for investors who
are pursuing yield in markets they do not understand.
OPENCIRCLE WEALTH PARTNERS
Sluggish US Recovery
The current expansion, which started in mid-2009, has
been deemed the weakest in postwar history. In past cycles,
strong recessions were followed by strong recoveries. But
the current rebound has produced economic growth of just
2.4%, compared with a 3.4% postwar average. In 2012,
investors watched eagerly for signs that the US recovery was
gaining steam. The weak economy was the central focus in
the presidential election, and the debate raged over what
combination of fiscal, tax, and regulatory policies would
lead to higher growth and job gains.
Overall, there was continued weakness in job growth,
real wages, consumer confidence, and spending. Positive
news also surfaced throughout the year, including healthy
corporate earnings and strong balance sheets, continued
low inflation, falling oil prices, historically low mortgage
rates, a strengthening housing market, and upticks in auto
sales and manufacturing activity late in the year.
Continued European Debt Troubles
The euro zone continued its struggle to contain the
sovereign debt problems of several member nations,
including Spain, Italy, and Greece. The inability of these
governments to pay interest on their debt has impacted the
banks in stronger European countries, notably France and
Germany, which have large exposure to the sovereign
bonds. The European recession prompted banks that
are holding the troubled assets to reduce lending, which
contributed to lower growth across the region.
During 2012, the euro finance ministers agreed on a second
bailout package for Greece, which included a 53% write-
down for investors in Greek bonds. In May, concern grew
over Spain’s fiscal health when a major bank requested a
massive bailout and disclosed troubled assets. Following the
Greek election in June, the European central bank pledged
to provide monetary support to protect the euro, triggering
a rally in stocks and bonds.
Rising Global Economic Worries
According to International Monetary Fund estimates, the
global economy grew 3.3% in 2012—down from 3.8% in
2011 and 5.1% in 2010. There was concern that the
worsening euro debt crisis would spread to other economies