lane asset management 2011 stock market 2011 review and 2012 fearless forecast

8/3/2019 Lane Asset Management 2011 Stock Market 2011 Review and 2012 Fearless Forecast

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Happy New Year

Market Recap for December 2011 (See

the top chart on page 3.)

December was another volatile month

for the market as early hopes from the

European summit deal (that was the

fourth or fifth this year to address the

Euro crisis) met the reality of trying to

reconcile parochial national interests

with those of the European region as a

whole. All equity markets sold off as

fears of recession increased, not to men-

tion potential European bank failures. In-

vestors crowded into the dollar for safety,

driving down gold as well as Treasury

rates.

Then, the tables turned. Some unexpect-

edly good economic news with housing

starts turning in their best in 19 months,

consumer confidence reaching a 7-month

high and initial jobless claims remainingbelow 400,000 in the U.S. while yields on

Spanish bonds fell sharply and the ECB

increased lending to banks in a record

amount. It was all the market needed

following two weeks of more depressing

news out of Europe as the S&P 500

gained a near daily record of 3% on De-

cember 20th and has maintained positive

momentum through the end of the year.

December, like prior months, was a news

driven market.

Recap for All of 2011 (See the bottom

chart on page 3.)

2011 was not a great year for forecasters

or money managers. According to Bar-

ron’s, their 10 strategists and investment

managers had forecast a roughly 10% in-

crease in the S&P 500 for 2011 (with a

range of +7% to +17%). Nearly all ex-

pected stocks to outperform bonds. Ac-

cording to Goldman Sachs, through mid-

November, only 16% of large cap growth

fund managers had exceeded their

benchmarks and most mutual fund man-

agers had underperformed following

similarly disappointing results for 2010.

In addition to underestimating the im-

pact of the European debt crisis, analysts

also overestimated the path of 10-year

Treasury rates. Even PIMCO, the world’s

largest bond manager, had forecast

higher rates during 2011 for which they

apologized to investors in October.

On one level, it was understandable that

the 2011 forecasts were so off base. As I

mention later in my forecast for 2012, the

2012 Forecast and Stock Market Commentary January 1, 2012

Lane Asset Management

Welcome to my annual year-

end summary and forecast.

The developed economies in

Europe and the U.S. face

enormous challenges in the

years ahead. Crushing debt

on the books, to say nothing

of the unrecognized future

obligations from entitlement

programs, seemingly intrac-

table high unemployment

and, especially for the U.S.,

deteriorated infrastructure

and educational systems, all

pose seemingly impossible

challenges to policy makers.

Private sector growth needs

to be stimulated, the public

sector needs to tighten its

belt, and public investments

need to be made. These are

contradictory objectives giv-

ing rise to political gridlock

and uncertainty.

Yet, despite these headwinds,

I firmly believe it is possible

to prosper from investments

in the years ahead with less

angina if we manage expecta-

tions and avoid exposure to

riskier segments of the mar-

ket.

All best for the New Year.

— Ed Lane

long term trend for equity prices has been

about 9.5% if you strip away the bubbles and

recessions (see the chart on page 8). Like-

wise for the path of Treasury rates as they

had reached an historic low in December of

2009, a near-historic low again in October

2010, and had bounced back strongly by the

end of 2010. Who knew that the situation in

Europe would reach a near breaking point

and that, despite a downgrade in U.S. Treas-

uries by Standard and Poor’s, Treasuries

would become such a safe haven that 10-

year rates would establish yet another newnear historic low at 1.84%?

Well, a few people did. The macroeconomic

environment in the U.S. and, especially, in

Europe was there for all to see. And Rogoff

and Reinhart had made a strong case in

their book This Time Is Different, published

in late 2009, that credit-induced recessions

take many years to unwind.

So, what’s different for 2012? Not much

really — but we’ll get to that in my 2012

forecast starting on page 4.

First, a brief recap of 2011:

Perhaps it’s an oversimplification, but as I

look back, I see these factors as having

borne most heavily on stock market per-



formance in 2011:

The driving dynamic was the European

debt crisis that was punctuated by partial

nationalization of Dexia Bank and the on-

going saga of sovereign default in Greece

and other countries in “peripheral” Europe.

The debt (and political) crisis in the U.S.

seems to have had a much smaller impact,

relatively speaking, at least so far.

The unemployment picture in the U.S.

played prominently in market psychology

with a strong early showing for non-farm

payrolls followed by poor to mediocre re-

sults midyear and later. Through 11 months

of 2011, nonfarm payrolls averaged 131,000

on a preliminary basis, at least 20,000 less

than what is needed to keep pace with

population growth.

Corporate earnings exceeded expectations

and came in strong throughout the year

(according to the BLS, after-tax earnings

were up 11% for 2011Q3 vs. a year prior). I

believe this was critical for the 2011 market

to have performed as well as it did, an im-

portant point to keep in mind for 2012.

Real GDP has been increasingly positive,

though anemic throughout the year, with

Q3 GDP about 1.5% above the level a year

prior.

Perhaps nothing was more impactful to

2011’s volatile market performance than the

role of governments and central banks step-

ping in when things begin to look most bleak.

In the U.S., the Fed introduced “Operation

Twist” in September as a follow-on from QE2

that ended in June. In Europe, there were nu-

merous announcements — and some modest

steps — to ease the debt crisis there that has

been plaguing both sovereigns and banks.

The ECB’s lending to banks on favorable

terms at the end of December led to a sig-

nificant year-end market boost.

As shown in the bottom chart on the next page,

the markets had a roller-coaster year. The U.S.,

Europe and emerging markets retained the

positive momentum that began in early 2009 all

the way through April of 2011 (with a short-

lived interruption in April-May 2010). Then, per-

haps on account of the increasingly visible

weakness in the macroeconomic factors, the

market more-or-less drifted for the next couple

of months before turning down and becoming

quite volatile for the balance of the year as mar-

ket performance was driven by daily headlines.

Emerging markets, led by China and India, fared

the worst for 2011 as investors adjusted their

enthusiasm from prior years in the face of local

2012 Forecast and Stock Market Commentary


inflation fighting and knock-on effects of a

slowdown in the developed markets.

Oil pretty much followed the equity path as

recession fears ebbed and flowed while gold

held on to a 10% gain after being up more than

30% earlier in the year.

While equities were highly volatile, the aggre-

gate bond index that incorporates both invest-

ment grade corporate bonds and U.S. Treasur-

ies turned in a steady and respectable per-

formance, ending the year up over 7%. Though

not shown on the next page, low interest rates

on shorter term Treasuries held the aggregate

bond index back a bit, the net effect of which

was that the investment grade corporate bond

index outperformed the aggregate index with

a total return of over 9%. The bottom line is

that the S&P 500 gained 2% on the year, in-

cluding dividends (the actual index was flat for

the year as it does not include dividends) de-

spite rosier expectations at the beginning of

the year. Which leads us to what we might ex-

pect for next year.

** *** **

(Performance results for exchange-traded

funds (ETFs) are used as proxies to the actual

indexes unless noted otherwise.)



As you view this chart and on the following pages, note that exchange-traded funds (ETFs) are used as proxies for the indicated market indexes since indexes cannot be invested in

directly and the ETFs are chosen to be as close as possible to the performance of the indexes while representing a realistic investment opportunity. Prospectuses on these ETFs can be

found with an internet search on their symbol. Past performance is no guarantee of future results.


December and All of 2011



I begin with a forecast of economic condi-

tions followed by a forecast of stock mar-

ket performance. My forecasts are based

on extensive reading of those produced by

others overlaid with my own estimate of

things to come.

Note that forecasters seem to have taken

their disappointing 2011 experience to

heart by avoiding definitive forecasts and

producing more of the “if this...then that”

type forecast for 2012. In my book, this is

another way of saying “here are the mac-

roeconomic issues to be looking out for; beaware of the big picture but be sensitive to

markets as they develop throughout the

year; and don’t rely on beginning-of-the-

year forecasts, making adjustments ac-

cordingly.” Makes sense to me.

The Economic Forecast for 2012

The three principal economies driving per-

formance of investment markets are

Europe, Emerging Markets (especially

Latin America and Asia/Pacific excluding

Japan) and the U.S.

Europe:

The 27 countries of the European Union

represent the largest economic block in

the world. Within the EU is the Eurozone,

a group of 17 countries that make up the

monetary union with a common currency, the

Euro. It is primarily within the EZ that the

impact of the sovereign and bank debt crisis

on the world’s economies is being played out.

In a nutshell, as the indebted sovereign na-

tions are less and less able to service their

debt and as the bank’s private borrowers de-

fault, both entities face an increasingly likely

financial collapse. And the problems are not

limited to just the EZ countries as others in

the EU, Great Britain being a prime example,

have similar issues.

Given the EU’s global interconnectedness

through financing and trade, what happens in

the EU has global implications. And, given the

severity of the problem, every plausible solu-

tion at this stage (debt restructuring, EZ

breakup, currency devaluation, fiscal auster-

ity) has negative, potentially disastrous, impli-

cations for the European — and the world’s —

economy, at least in the short run.

So, while Germany and France try to save the

Euro and the EZ through more coordinated

and tighter fiscal management throughout

the EU, this is proving difficult to do on politi-

cal grounds. Whether or not they are success-

ful (it looks like we will know more toward the

middle of 2012), the implications, in the very



best of circumstances, are slower

growth in the short run in Europe

(many say recession) and knock-on ef-

fects throughout the world (if inter-

ested, see The Boston Consulting

Group’s report for a more in-depth and

sobering analysis: http://www.bcg.com/

documents/file94255.pdf ). And that,

dear reader, will likely be the story of

2012 (absent a major terrorist attack,

war or climatic calamity).

Emerging Markets:

Despite leading global GDP growth, the

main story about emerging markets in

2012 will be the impact on exports they

will feel from the slowdown in Europe

and the U.S. On the other hand,

emerging markets may adopt more ac-

commodative monetary policy coming

off successful inflation-fighting actions

taken in 2011, offsetting some of the

export loss with domestic develop-

ment.

In the long run, it is the general consen-

sus that emerging markets will drive

global equity performance. For a while,

in the post-tech bubble period of 2001-

2008, it certainly looked that way.

Lately, that seems to be less the case.

To quote from Bob

McTeer, former head

of the Dallas Fed, “The

first rule of forecasting

should be don’t do it.

Nothing good comes

from it. The second rule,

is, if you give a number,

don’t give a date; or, if

you give a date, don’t

give a number. My rule,

the third rule, is, if you

have to do it, do it of-

ten.“

I like that third rule

best. Like others, I

barely missed my 2011

S&P 500 forecast if

measured as of the end

of April. However, I

was way off for the

year. So, the lesson is:

pay attention to the

macroeconomic events

that will drive the

longer term market

performance, but pay

even closer attention

to the immediate tech-

nical outlook if timing

is important to you.

http://www.bcg.com/documents/file94255.pdf







And, on account of corporate globalization, it’s pos-

sible that deftness on the part of global corpora-

tions in the West may prove to be a more attrac-

tive investment opportunity than investing directlyin the local EM economies. Time will tell , but it’s

food for thought.

The United States:

In fundamental ways, the financial problems in the

U.S. are very much the same as in Europe: high na-

tional debt, high unemployment, and political im-

pediments to taking decisive action. In addition,

the inevitable slow down/recession in Europe will

take a toll on American businesses on account of

the impact on exports as well as profits generated

from overseas operations. To make matters more

difficult, the sources of American business success

in 2011 (imported profits from overseas operations,

cost cutting through labor reductions, a declining

dollar that enhanced exports as well as foreign

profits, and stock buybacks) will not be available to

nearly the same extent in 2012.

On the other hand, the U.S. has advantages that

Europe does not have: a single national government

that can make sweeping fiscal and regulatory

changes when the pressure gets high enough (take

the recent two-month tax relief extension, for ex-

ample) and a central bank that has the proven abil-

ity to take decisive and effective action to prevent,

or at least mitigate, a recession or deflation.

American businesses have the further advantage of

having the strongest balance sheets they’ve had in

years.

Against that backdrop as well as the presidential

election in November, here are my economic fore-

casts for 2012:

An unemployment rate that will end the year

between 8% and 8.5%

Average monthly additions to non-farm payrolls

of about 150,000 but generally increasing

throughout the year

Annual CPI increase of 2.5% measured from

2011Q3 to 2012Q3.

Real GDP growth of 1.5%, less if the temporary

payroll tax cut and unemployment benefits are

not extended for the entire year

A decline in corporate after-tax profits to under

8% as reported by the Bureau of Economic

Analysis vs. 11% (including certain adjustments)

reported for Q3/2011 over Q3/2010,

Stabilization in home prices though no real dent

in the stock of unsold houses

10-year Treasury rate remains under 2.25%

No significant tax reform in 2012, but the prom-

ise of action in 2013 as a result of the election

process



Though all countries will be looking to

weaken their currencies to boost exports,

the dollar will have a net strengthening as

a result of a “flight to quality” and remainthe best of a bad lot (of course, all coun-

tries can’t be successful in this relative

measure).

The preceding forecast assumes there is no

financial calamity in the form of a breakup of

the Euro or major bank or sovereign failures,

nor is there a geopolitical event such as a

major terrorist attack or military conflict.

The Investment Forecast for 2012

The Equity Markets

Before making predictions, let’s start with a

few observations:

Page 8 shows the total return of the S&P 500

index over the last 30+ years and the last 10.

The longer term chart shows that over

extended periods of time, if you ignore

the disruption caused by the tech bubble

and the “adjustment” that came about as

a result of the current recession, the index

growth from peak-to-peak and trough-to-

trough averages roughly 9.5%. This chart

also shows that the index generally stays

within a range of +/- 12% around its 50-

week moving average.



The shorter term chart shows this pattern in a

more magnified manner for the last 10 years.

The 9.5% pattern continues, though this trend is

shorter and, therefore, less reliable.

The charts show a weakening 50-week moving

average as well as weakening signals in the bot-

tom graphs (MACD and Full STO

(stochastics)).

Based on this technical analysis and what many be-

lieve about the challenges confronting the world’s

economies, specifically high debt and unemploy-

ment and a lack of consensus on how to address

these issues, my forecast for the S&P 500 for 2012

is a range of a positive 4% to 7% (absent a collapse

of the Euro or another major economic, geopoliti-

cal or climatic calamity, and assuming at least

modestly stimulative government policy actions in

Europe and the U.S.). A major policy move that

floods the market with liquidity and/or a huge gov-

ernment stimulus boost (as unlikely that as that

appears to be today) would result in a much higher

outcome for the S&P though what it would do to

long term debt issues could be more problematic.

Ultimately, while there is usually a lot of interim

noise, equity prices move on the basis of actual and

anticipated corporate earnings. In fact, corporate

earnings weren’t half bad in 2011 yet the S&P was

flat reflecting, I think, anticipation of more subdued

future earnings. And, it’s that lowered expectation

in the face of a likely global downturn that could

restrain equities again in 2012 (it’s impossible totell how much has already been taken into ac-

count).

I hate to be a pessimist, but combating the severe

state of European and U.S. debt may take a larger

toll on equity markets than we have seen so far.

Maintaining the long-term 9.5% trend will be more

difficult as long as the debt overhang remains with

us. For that reason, it is critical that investors man-

age risk even more tightly in the years ahead.

Page 9 shows the relative performance of the Dow

Jones European Index and the Morgan Stanley

Emerging Market Index relative to the S&P 500 In-

dex. Both charts show relative strength for the

S&P 500 and my expectation is that the S&P 500

will continue to outperform Europe and emerging

markets for the year. Remember, while Europe ap-

pears to be trying to address the problem through

fiscal integration and increased liquidity, as of this

writing, nothing has been settled and we still seem

to be a long way off from reaching a conclusion to

the crisis. That said, nothing moves in a straight

line and we shouldn’t be too surprised if the strong

relative performance of the S&P 500 in recent

months has reversals of some magnitude during



the year.

My belief in the ultimate outperformance of

the U.S. market in 2012/2013 is based not

only on the technical analysis, but also on ac-

count of a combination of America’s global

business orientation (thereby allowing inves-

tors to benefit from emerging market GDP

growth without having to make riskier direct

investments), and the greater concentration

of power of its central government and cen-

tral bank than exists in Europe or the

emerging markets. This power will, I hope

and believe, manifest itself in a more busi-ness friendly environment during the elec-

tion year and the years that follow, regard-

less of who wins in November. Eventually, I

do expect the international markets, led by

emerging markets, to bounce back. I just

don’t see it happening in the near future.

In terms of domestic sectors, I believe 2012

will turn out much like 2011 in that investors

will seek safety in high quality companies

with strong balance sheets, growing cash

flow and a history of increasing dividends.

I’m not prepared to go out on a limb for

many sectors, but I expect consumer staples,

utilities, health care and non-financial divi-

dend payers to perform well again in 2012 as



they did last year. I see these as “safe” sectors in a

highly uncertain investing climate even if their per-

formance lags the broader S&P index at times. As

global growth stabilizes and recovers, technologyand consumer discretionary sectors should be

among those that begin to outperform.

Income-based Markets

With the 10-year Treasury rate at 1.9% at year-end,

how much lower can interest rates go? The Fed

has indicated it won’t be raising short term rates

prior to mid-2013, if then. But that doesn’t keep

longer term rates from dropping further as inves-

tors seek safety in high quality corporate and U.S.

Treasury bonds.

The charts on page 10 show total return over the

last 15 years for the Dow Jones Corporate Bond

and the Nuveen Municipal Closed-end Fund Total

Return Indexes. Note that over the same period

that these indexes had a total return of over 190%

and 150%, respectively, the S&P 500 had a total re-

turn of 70% (note that these percentages are

highly sensitive to their end dates). In 2011, these

indexes had a total return of about 8% and 20%, re-

spectively.

My forecast for 2012 is that the 10-year Treasury

rate will remain under 2.25%, though we can as-

sume it can’t remain that low forever.

In the case of the corporate bond index, with a

current yield of about 4.5%, a significant portion of

total return came from capital appreciation as in-

vestors moved into safer investments. Assuming

demand for investment grade corporate bonds willbe about the same as in 2011, I estimate that the

corporate bond index will gain 7-8% in 2012.

For municipal bonds, a significant portion of the to-

tal return in 2011 was on account of recovery from

a negative outlook from a prominent analyst made

in late 2010. Also, since the underlying securities to

the closed-end fund index use leveraged funds, a

portion of the gain can be attributed to current

low borrowing rtes. Taking that all into account, Iestimate that this index will advance about 6.5% in

2012, about half of which will come from federally

tax free yields.

A corner of the fixed income market that I believe

will do well in 2012 as it did in 2011 is preferred

stocks. Since this is a relatively thin market, diver-

sification can be achieved through funds specializ-

ing in this area.

Commodities and Precious Metals

I learned a valuable (read: painful) lesson in 2011

with precious metals. It’s not only that they under-

performed my (and popular) expectations

(especially silver and platinum), it’s that I saw their

price behavior driven by factors that changed virtu-

ally overnight (such as revisions to margin require-



ments, military conflict, financial upheaval,

sovereign purchases, speculation, and hype).

As 2011 drew to a close, the strengthening

of the dollar correlated with a decline in the

value of precious metals (a correlation that

hasn’t always held up). Assuming this rela-

tionship does continue, however, an invest-

ment in precious metals would be a hedge

against a decline in the value of the dollar.

With the financial crisis in Europe likely to

continue for awhile longer, I would not be

prepared to bet against the dollar as a safe

haven at this point.

Putting this all together, while I’m aware of

studies that indicate gold can enhance re-

turns without added portfolio risk, I see in-

vestments in precious metals and commodi-

ties more of a trading “play” than a long

term investment and would limit invest-

ments in these categories to small portions

of a portfolio, if that much.

** *** **

2012 is likely to continue the volatility that

marked 2011. I recommend investors keep

an eye on technical factors that may signal a

reversal in a current trend. Above all else,

manage risk carefully and be careful out

there.



SPY is an exchange-traded fund designed to match the experience of the S&P 500 total return index. Its prospectus can be found online. Past performance is no guarantee of future results.


Since September 2010, the S&P has been unable to get out of the trading range of roughly 1125 to 1350

(112.5 to 135 for SPY, the ETF that reflects the S&P 500). More recently, the S&P has been trading in the

range of roughly 1125 to 1250/1275. Since the essence of technical analysis is to identify a trend or pat-

tern that can be expected to perform in a reliably predictable way, what we have over the last 15 monthsis a range bound S&P, and an even more narrow range in the last 5 months. Since the moving averages are

not now showing a clear trend, my analysis for the S&P is that trading will remain in the narrow band of

1125 to 1275 until the market feels comfortable that the economic crisis — primarily the one in Europe — has been effec-

tively addressed (a sustained breakout above 1275) or not (a sustained breakout below 1125).

Accordingly, I advise caution in terms of any substantial commitment to owning equities along with an awareness of the volatility that has

been with us for the last 5 months and shows no sign yet of abating. For short term traders, I would consider adding risk as the S&P gets

closer to the bottom of the range (1125) and shedding risk as it gets closer to the top (1275), which is not too far from where we are at today

at the beginning of January. For longer term traders, I would have cautious optimism on the basis of having a likely floor to the S&P around1125 along with the (hopefully effective) political pressure to resolve the European (and U.S.) debt crisis in coming months.

S&P 500



EZU is an exchange-traded fund designed to match the performance of the MSCI European Monetary Union Index. Its prospectus can be found online. Past performance is no guarantee of

future results.


Following the strong equity recovery from mid-2010 to mid-2011, the EMU bowed to the strains of the sovereign

and bank debt crisis that grips Europe. Since reaching its most recent peak at the end of April 2011, the iShares

exchange-traded fund EZU has lost over 30% of its value and has been trading in a range of $25 to $33 for the

last 5 months. While the moving averages are in a decidedly downward trend, it is interesting to note that both

the short term and the long term MACD analyses have been maintaining a neutral stance for the last two

months. One positive that can be taken from the chart below is that $25 seems to be a lower bound for the

fund and the current price is much closer to that level than the upper bound of the current range at $33. This

could provide some support to those who believe European equities have been fully discounted for the current crisis. Given the uncertainty in

the Eurozone, the strong trend in the moving averages, and the opportunities in the U.S., I would avoid investments in European equities at the

present time for all but the most aggressive portion of a portfolio allocation.

European Monetary Union (EMU)



EEM is an exchange-traded fund designed to match the performance of the MSCI Emerging Markets Index. Its prospectus can be found online. Past performance is no guarantee of future

results.


The emerging market equities have followed the same path as European equities shown on the prior page and,

frankly, the analysis and recommendations here are the same as for European shares. Avoid emerging markets

for all but the most aggressive portions of a portfolio; consider additions close to the bottom of the $35 to $42

price channel and lighten exposure closer to the top.

The main thing I am looking for in this chart over time, in addition to a sustainable reversal, is a departure from

European equity performance that might justify what many analysts believe to be the greater potential of

emerging markets. For now, it appears these two markets are in close alignment with very little difference in performance over the last two

months and, for that matter, over the last two years.

Emerging Markets



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.


AGG represents the total return (capital gains and interest income) of a composite of domestic govern-

ment and investment grade corporate bonds and similar instruments. LQD represents the total return

for investment grade corporate bonds alone.

Note the initial dip followed by flatness of the performance in late 2010 / early 2011. This corresponds to

an increase in interest rates at the time. For December, LQD had another stellar performance with a gain of over 3% as in-

vestors again sought safety. AGG had a more modest, but still respectable, 1.3% gain for December, held back relative to LQD by the low yield-

ing short term Treasury bills in the portfolio.

Last month’s trend reversal appears at this point to have been short-lived. That said, while I believe both LQD and AGG will perform well for

2012, the MACD on both charts is sending out a bit of a warning flag. Eventually, we will be seeing higher interest rates and, when that happens,

these funds will likely react as they did in late 2010/early 2011. For now, I would not hesitate to maintain something like a strategic allocation to

LQD but would be wary of going beyond that when good income-oriented alternatives are available.

U.S. Aggregate and Corporate Bonds



SPY, LQD, and VEU are exchange-traded funds designed to match the experience of the S&P 500 total return index, the iBoxx Investment Grade Corporate Bond Index, and the FTSE All-

world (ex US) index, respectively. Their prospectuses can be found online. Past performance is no guarantee of future results.


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 (VEU) on the right.

On the left, we can see that the S&P 500 began outperforming bonds in October, although it has been a volatile relationship. While we are still

in the early stages of this relative performance, support remains to favor exposure to equities relative to bonds, though not strong enough, in

my opinion, to depart far from a strategic long-term allocation. On the right, we see the S&P 500 continuing to outperform the international

index, a pattern that began over a year ago, and reinforcing my view that there is no current motivation to holding significant amounts of inter-

national equities.

Asset Allocation and Relative Performance



Lane Asset Management 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 represen-

tatives are properly licensed or exempted.

No advice may be rendered by Lane Asset Management 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


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 questions you may have. You can find me at:www.LaneAssetManagement.com

[email protected]

Edward Lane


P.O. Box 666

Stone Ridge, NY 12484

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.

http://www.lanefinancialmanagement.com/


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