January, 2012
By Darren Nyce, CFA
Senior Research Analyst, Castle Investment Advisors®, LLC

My son LOVES playing LEGO® Batman video games. He maneuvers Batman as he smashes, builds, drives, and fights (POW! BIFF! WHAM!) his way through the streets of Gotham in an effort to thwart the Riddler, the Joker, and other dastardly villains. In this multiple level game, the characters must solve puzzles and properly apply their super powers in order to successfully complete their current chapter. While this can be played as a single player, my son has realized that he has much more success; less frustration, and as a result, increased enjoyment by having someone else play with him as Batman’s sidekick Robin.

We at Castle Investment Advisors® are thrilled once again in 2012 to play the part of Robin as we travel along side of our clients on their financial journey. While we don’t possess the ability to glide from building to building, super human strength, or even have access to a freeze ray, our team does have many years of experience in navigating various economic and investing environments which allows us to be a helpful partner. We commit to stand beside our clients and use the skills that we have to help attack obstacles that might keep them from achieving their goals. This process is inherently long term in nature, and will inevitably take twists and turns along the way. We hope this will result in an experience that is more successful than they would have on their own and less frustrating, making the overall investing experience more enjoyable.

So what did we have to navigate in 2011? Here are some of the events that made headlines:

  • Massive Earthquake and Tsunami in Japan
  • Occupy Wall Street Movement
  • European Debt Crisis
  • Misbehavior of Powerful Men
  • U.S. Debt Ceiling Debate
  • S & P Downgrade of U.S. Debt
  • GOP Primary Race
  • Royal Wedding
  • Death of Osama bin Laden
  • 10 Year Anniversary of 9/11
  • Final Space Shuttle Mission

How did the stock market react to all of these things: Much like an amusement park ride that takes you through several steep elevation climbs and descents then drops you off right where you began. The S&P 500 Index ended the year almost exactly where it started, though the journey to get there was quite volatile. Here are some 2011 statistics regarding the S&P 500:

  • 58 of the 500 stocks gained 25% or more
  • 155 of the stocks gained 10%+
  • 266 of the stocks had negative returns for the year
  • The index rose on 55% of the trading days, falling on 45%
  • Removing the 3 best days reduces the index return to -10.7%
  • Removing the 3 worst days improves the return to 20.2%
  • Including the impact of reinvested dividends, the return rises to 2.1%
  DJIA Index S&P 500 Index NASDAQ Index
Open (Jan. 3, 2011) 11,577 1,258 2,677
High for Year (date) 12,811 (Apr. 29) 1,364 (Apr. 29) 2,874 (Apr. 29)
% Increase from Open +10.7% +8.4% +7.4%
Low for Year (date) 10,655 (Oct. 3) 1,099 (Oct. 3) 2,336 (Oct. 3)
% Decrease from Open -8.0% -12.6% -12.7%
Close for Year (Dec. 30, 2011) 12,218 1,258 2,605
% Change for Year (Open-Close) 5.5% 0% -2.7%
% Range for Year (High-Low) 18.6% 21.1% 20.1%

Looking forward to 2012, we see an economy that appears to be getting better, but still faces significant challenges.

  • Employment is growing
    • Though not very fast and unemployment is still high
  • Monetary policy remains accommodative
  • Trends in consumer spending are strengthening
  • Gas prices are lower
  • Business inventories are generally lean
  • Manufacturing numbers are encouraging

These things are happening in the context of worries of a meltdown in Europe, the uncertainty of a presidential election and continued partisanship regarding taxation, spending and general economic policy. Meanwhile the housing market continues to struggle and remains a headwind to full economic recovery.

We expect overall growth to continue, but at a sluggish pace. We also expect there to be continued and significant market swings similar to what we saw last year.

One of the consistent pieces of good news has been the high levels of corporate earnings and profit margins. The fact that this has been able to happen at the same time that consumers have been generally deleveraging is pretty remarkable; and an indication that the gains have come from companies becoming more efficient and productive rather than by increasing revenues. There is a natural limit to how long such improvements can be made.

Our investment allocations continue to feature broad diversity with exposure to a wide array of asset classes in an effort to limit our downside exposure. We are emphasizing income producing securities such as dividend paying blue chip stocks, floating rate bonds, and high yield bonds.

Best wishes for a safe and prosperous 2012 from your sidekicks at CWA.

The Castle Investment Advisors®, LLC Investment Team

Tax, legal, and estate planning advice contained in this article is general in nature. Always consult an attorney or tax professional regarding your specific legal or tax situation.
This article was prepared for informational purposes only and does not constitute an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Information presented does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information regarding products and services. It should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. 
Any strategy discussed herein may not be suitable for all investors. Before implementing any strategy, investors should confer with their financial advisor. No current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels.