e year opened with lingering concern about the weak US
recovery, the debt crisis in Europe, and political uncertainty
around the world. Many nancial pundits had predicted
another lackluster year for stocks and more market volatility.
Some predicted a euro zone breakup triggered by impending
debt defaults in Greece and Portugal. e global economy
was showing early signs of a slowdown, and many investors
were weighing the potential economic impact of the US
elections and so-called “scal cli.
Despite a steady diet of bad news, most markets around the
world climbed the proverbial “wall of worry” to log strong
returns. Major market indices around the globe delivered
double-digit total returns, and as a group, the non-US
developed and emerging markets outperformed the US
equity market. e total market value of global equities, as
measured by the MSCI All-Country World Index, increased
by an estimated $6.5 trillion in 2012, while market-wide
volatility fell to its lowest level in six years.
Throughout 2012, nervous investors did not have to look hard for reasons
to avoid the financial markets. The daily headlines provided abundant
gloom to feed their doubts, but investors who acted on impulse could
have missed a potential opportunity to participate in strong returns
across the global financial markets.
2012 Review:
Economy & Markets
January 2013
2
e above graph highlights some of the year’s prominent
headlines in context of broad US market performance, as
measured by the Russell 3000 Index. ese headlines are not
oered to explain market returns. Instead, they serve as a
reminder that investors should view daily news events from
a longer-term perspective, and avoid making investment
decisions based solely on the news.
e world stock market performance chart below oers a
snapshot of global stock market performance, as measured
by the MSCI All Country World Index. e global headlines
show that despite an abundance of negative news during the
year, global stocks had an exceptional year.
“Investors Continue
to Yank Money out
of Stocks”
“Worldwide Gloom
Keeps Investors
Close to Home”
“Motorists Feel the Pinch
as Gas Prices Keep Rising”
“Stocks Finish at
Multiyear Highs”
“For Stocks, Here's
the Long-Awaited
Wakeup Call”
“Why
Facebook
Is Likely to
Face-Plant”
“Why US Economy Is Heading
back into Recession”
“Housing Double-Dip
Worsens as Prices Fall
to New Lows”
“Jobs Report, Market
Slide Raise Fear of Cruel
Summer Ahead”
“Supreme Court Upholds
Obama Healthcare
Mandate”
“Bill Gross: We’re Witnessing
the Death of Equities”
“Apple Now
Biggest-Ever
US Company”
“Household Income
Sinks to ’95 Level”
“US Home Prices
Make Biggest
Jump in 6 Years”
“US Growth
Rate Slows”
“Fed Launches
QE3”
“Monster Storm
Targets East”
“Obama Maps out
His Second Term”
“Focus
Shifts to
Fiscal Cliff”
“US to be World’s
Top Oil Producer
in 5 Years”
“Apple Shares
Swallow Biggest
Loss in 4 Years”
“Will Deficit
Reduction
Crush Stocks?”
“US Stocks
End with a
Bang”
US Stock Market Performance
Russell 3000 Index with Selected Headlines from 2012
3000
3200
3400
3600
3800
4000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Russell Investment Group.
In US dollars. Index is not available for direct investment. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results.
RUSSELL 3000 INDEX
Annualized returns as of December 31, 2012
1 Year 16.42%
3 Years 11.20%
5 Years 2.04%
10 Years 7.68%
US STOCK MARKET PERFORMANCE
Russell 3000 Index with Selected Headlines from 2012
Source: Russell Investment Group.
In US dollars. Index is not available for direct investment. Performance does not reflect the expenses associated with management of an actual
portfolio. Past performance is not a guarantee of future results.
World Stock Market Performance
MSCI All Country World Index with Selected Headlines from 2012
110
120
130
140
150
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: MSCI.
In US dollars. Index is not available for direct investment. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results.
MSCI ALL COUNTRY WORLD INDEX (NET)
Annualized returns as of December 31, 2012
1 Year 16.13%
3 Years 6.63%
5 Years -1.16%
10 Years 8.11%
“Europe Poses
Global Recession
Threat”
“World Stocks
Set to End
Year with
Gains of 15%”
“Oil Spikes on
Iran Fears”
“Euro Zone Edges
Closer to Recession”
“China Slowdown Could
Spur Global Recession”
Higher Oil Prices Will
Sap World Growth”
“Greek Economy
Shrinks Further”
“Germany’s
Economy Shrinks,
Recession Fears
Loom in Europe”
“Syrian Violence
Escalates into
Civil War”
“The Bottom Line:
Central Bankers
Are Worried”
“Moody’s Downgrades
Global Banks”
“Spanish Crisis
Deepens”
“Oil Falls on
Sputtering
Economic
Growth”
“More Bad
News for
the UK
Economy”
“Japan Falls into
Recession”
“Manufacturing Downturn
Spreads Gloom across
Asia, Europe”
“UN Urges Action
to Avert Global
Food Crisis”
“IMF: Global
Recession
Risk Grows”
“World Bank
Sees Long
Crisis Effect”
“Wheat Soars after
Russian Crop Failure”
“EU Budget
Talks Collapse”
WORLD STOCK MARKET PERFORMANCE
MSCI All Country World Index with Selected Headlines from 2012
Source: MSCI.
In US dollars. Index is not available for direct investment. Performance does not reflect the expenses associated with management of an actual
portfolio. Past performance is not a guarantee of future results.
3
Eur
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, Chinas economy showed signs
of weakening, with growth expected to fall to around 8%—a
signicant drop from its historical growth rate. China
exports heavily to the euro zone. e crisis also threatened
to reduce Chinas 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 condence 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 indenite
period, some investors found appeal in riskier xed income
securities, such as junk bonds, emerging market debt, and
collateralized loan obligations that oer higher yields.
Wall Street responded to rising demand with new
oerings. 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
ECONOMIC BACKDROP
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
and markets.
3
4
OPENCIRCLE WEALTH PARTNERS
2012 INVESTMENT OVERVIEW
Highlights
After a flat 2011, the US stock market posted a strong first quarter as the
US economy showed signs of improvement and perceptions of the
European debt crisis improved. The S&P 500 had its best first-quarter rally
in 14 years, closing near a four-year high and a 12.6% total return. When
the second quarter began, markets retreated as Europes debt crisis
returned to center stage and signs of slowing global growth emerged—
especially in China, where lower world demand had begun to affect
exports.
By June, US stocks had surrendered all of the years gains as markets
weighed how credit problems in Spain and the anticipated Greek
elections would affect the euro zones sovereign debt problems. The US
economy showed more signs of weakness. Stock markets around the
globe stumbled in the second quarter, with non-US stocks suffering the
most. During the summer, the markets improved, as European tensions
eased on increased European Central Bank loans to Spain and Italy.
There was also rising speculation that the Federal Reserve was prepared
to deliver additional monetary stimulus to the US economy. Throughout
the summer, analysts reduced their estimates of expected corporate
earnings growth as an economic slowdown threatened to reduce profits.
In September, the Fed announced its third round of quantitative easing
to push long-term interest rates lower and encourage more borrowing
and investment. The Bank of Japan also announced an ambitious plan to
stimulate its economy. These central bank actions helped drive the
markets during the third quarter. The S&P 500 surged 14% from its June
1 low and reached a five-year high on September 14. US economic
indicators sent mixed signals, but the economy reportedly expanded at a
3.1% rate for the quarter—the fastest pace since late 2011. Mortgage
rates reached historical lows, and year-over-year home prices rose for
the first time since the 2007 financial crisis. Heightened inflation fears
led to a modest decline in Treasury prices, while gold and most other
commodities rallied.
In the fourth quarter, investor attention turned to the close US election
and the prospect of gaining certainty regarding future government
spending, taxes, growth policy, and regulation. Stocks fell in the weeks
following the election as investors gauged the prospects of continued
political gridlock and the economic impact of spending cuts and tax
hikes, known as the “fiscal cliff.” The S&P recovered its earlier losses by
late December, however, and as the year ended, lawmakers scrambled to
reach a compromise.
Major World Indices
Three
Months
One
Year
Three
Years
Return (%)
US Equity Returns
Non-US Equity Returns (net div.)
Fixed Income Returns
Index
As of December 31, 2012
Russell 3000
Russell 2500
Russell 2000
Russell 2000 Value
Russell 2000 Growth
Russell 1000
Russell 1000 Value
Russell 1000 Growth
S&P 500
0.25
3.10
1.85
3.22
0.45
0.12
1.52
-1.32
-0.38
16.42
17.88
16.35
18.05
14.59
16.42
17.51
15.26
16.00
11.20
13.34
12.25
11.57
12.82
11.12
10.86
11.35
10.87
Three
Months
One
Year
Three
Years
Return (%)
Index
As of December 31, 2012
MSCI EAFE Small Cap
MSCI World ex USA Small Cap
MSCI EAFE
MSCI World ex USA
MSCI EAFE Value
MSCI World ex USA Value
MSCI EAFE Growth
MSCI World ex USA Growth
MSCI Emerging Markets
MSCI Emerging Markets
Small Cap
MSCI Emerging Markets Value
6.01
4.84
6.57
5.93
7.39
6.96
5.77
4.90
5.58
5.10
4.70
20.00
17.48
17.32
16.41
17.69
17.29
16.86
15.48
18.22
22.22
15.87
7.17
7.19
3.56
3.65
2.19
2.78
4.85
4.46
4.66
4.21
4.06
Three
Months
One
Year
Return (%)
As of December 31, 2012
BofA Merrill Lynch
Three-Month US Treasury Bill
BofA Merrill Lynch 1-Year
US Treasury Note
Citigroup World Government
Bond 1-3 Years (hedged)
Barclays US
Government Bond
BofA Merrill Lynch 1-5 Year
US Treasury and Agency
Citigroup World Government
Bond 1-5 Years (hedged)
Barclays US TIPS
0.04
0.06
0.27
-0.06
0.06
0.40
0.69
0.11
0.24
1.36
2.02
0.98
2.10
6.98
0.11
0.55
1.38
5.48
2.54
2.13
8.90
*
*
Three
Years
*
Three
Years
*
Other Returns
Dow Jones US Select REIT
S&P Global ex US REIT (net div.)
Dow Jones-UBS Commodity
Total Return
Three
Months
One
Year
Return (%)
As of December 31, 2012
2.31
6.19
-6.33
17.12
31.92
-1.06
17.94
12.12
0.07
*
Annualized
In US dollars. Indices are not available for direct investment. Performance
does not reflect the expenses associated with management of an actual
portfolio. Past performance is not a guarantee of future results.
MAJOR WORLD INDICES
*Annualized
In US dollars. Indices are not available for direct
investment. Performance does not reflect the expenses
associated with management of an actual portfolio. Past
performance is not a guarantee of future results
5
Market Summary
All major US market indices were up substantially for 2012.
e S&P 500 gained 13.4%, and with dividends included,
logged a total return of 16%. e NASDAQ Composite
Index gained 15.9% for the year, and the Russell 2000, a
popular benchmark for small company US stocks, returned
16.3%. e Dow Jones Industrial Average gained 7.3%. e
markets strong performance came with lower volatility, as
gauged by the CBOE Volatility Index, which had its largest
annual decrease since 2009.
Non-US developed market indices performed even better.
e MSCI World ex USA Index, a benchmark for large
cap stocks in developed markets outside the US, returned
16.4%. e MSCI Emerging Markets Index returned 18.2%.
Most country market returns were positive, although the
dispersion of returns was broad. Among the 45 equity
markets tracked by MSCI, only three—Chile (-0.1%), Israel
(-6.2%), and Morocco (-12.6%)—posted negative total
returns (gross dividends) in their local currency. Turkey,
Egypt, and Belgium were the top three performers, with
returns of 55.8%, 54.6%, and 38.5%, respectively. Greece
(4.1%), Portugal (3.3%), Spain (3.1%), and the Czech
Republic (0.2%) had the lowest positive total returns (gross
dividends; local currency).
e currency markets were relatively stable for the year due
to the osetting eect of US, European, and Japanese central
banks. e US dollar lost ground against the euro and many
emerging market currencies, which boosted equity returns
for US investors. e dollar gained against the yen as a
result of Bank of Japans monetary easing.
Small cap and large cap stocks had similar performance in
the US, but small cap substantially outperformed large cap
in both the non-US developed and emerging markets. Along
the price dimension, value stocks outperformed growth
stocks in the US and non-US developed markets, while
slightly underperforming growth in emerging markets.
In the xed income arena, US TIPS performed exceptionally
well, returning 6.9%, and short-term government bonds
returned 2.1%. Investors seeking a safe haven from global
market uncertainty poured money into US Treasury
securities, which pushed down yields.
Real estate securities in the US also had a strong 2012,
returning 17.1%. Global real estate had a banner year,
with a total return of 31.9%, which was the highest-ranked
return of major world asset classes. Commodities were the
only group to show negative returns for the year, at -1.06%.
e decline was their second annual drop, which had not
occurred since the late 1990s.
Major World Indices Ranked
By One-Year Performance (%)
As of December 31, 2012
S&P Global ex US REIT (net div.)
MSCI Emerging Markets
Small Cap (net div.)
MSCI EAFE Small Cap (net div.)
MSCI Emerging Markets (net div.)
Russell 2000 Value
Russell 2500
MSCI EAFE Value (net div.)
Russell 1000 Value
MSCI World ex USA
Small Cap (net div.)
MSCI EAFE (net div.)
MSCI World ex USA Value (net div.)
Dow Jones US Select REIT
MSCI EAFE Growth (net div.)
Russell 1000
Russell 3000
MSCI World ex USA (net div.)
Russell 2000
S&P 500
MSCI Emerging Markets
Value (net div.)
MSCI World ex USA Growth (net div.)
Russell 1000 Growth
Russell 2000 Growth
Barclays US TIPS
Citigroup World Government
Bond 1-5 Years (hedged)
Barclays US Government Bond
Citigroup World Government
Bond 1-3 Years (hedged)
BofA Merrill Lynch 1-5 Year
US Treasury and Agency
BofA Merrill Lynch 1-Year
US Treasury Note
BofA Merrill Lynch Three-Month
US Treasury Bill
31.92
22.22
20.00
18.22
18.05
17.88
17.69
17.51
17.48
17.32
17.29
17.12
16.86
16.42
16.42
16.41
16.35
16.00
15.87
15.48
15.26
14.59
6.98
2.10
2.02
1.36
0.98
0.24
0.11
In US dollars. Indices are not available for direct investment. Performance
does not reflect the expenses associated with management of an actual
portfolio. Past performance is not a guarantee of future results.
0 10 20 30
In US dollars. Indices are not available for direct investment.
Performance does not reflect the expenses associated with
management of an actual portfolio. Past performance is not a
guarantee of future results.
MAJOR WORLD INDICES RANKED
BY ONE-YEAR PERFORMANCE (%)
As of December 31, 2012
For more articles, visit our website www.opencirclewealth.com
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This information is for educational
purposes only and should not be considered investment advice or an offer of any security for sale.
OpenCircle Wealth Partners is an investment advisor registered with the State of Connecticut
Russell data copyright © Russell Investment Group 1995-2013, all rights reserved. Dow Jones data provided by Dow Jones Indexes. MSCI data
copyright MSCI 2013, all rights reserved. S&P data provided by Standard & Poor’s Index Services Group. The BofA Merrill Lynch Indices are used
with permission; copyright 2013 Merrill Lynch, Pierce, Fenner & Sm