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predicted. Even the Mayans were wrong in 2012. The world didn’t end on December 21st. Thankfully, the Mayans were wrong, and, thankfully, so were all of the other doomsday stock market prognosticators.

There has been so much talk over the last five years about a New Normal where markets are more volatile, returns are much lower and holding investments long term is passé. The old fashioned way of making money, buying good investments and holding them for years for an average return of 10 percent or so, seemed to be an antiquated notion, and we were assured that it just would not work anymore. Investment pundits flocked to the airwaves to tell us that buy-and-hold was dead and that investors needed to implement a new strategy to avoid

we’ll have to see what happens in 2013. China’s economy and stock market also were due to crash, possibly sending the rest of the world back into recession in 2012. China did slow, dropping from double-digit GDP growth to below 7 percent GDP growth. This certainly affected global growth, but not enough to invoke the R word. The low interest rates were expected to finally cause the bond market to implode, but no implosion has happened yet. As we maneuvered through an obstacle course loaded with landmines for the first three quarters of the year, we found it hard to feel optimistic; after all, we still had the presidential election ahead, and that surely had the potential to undermine the stock markets, depending on the outcome. Yet the re-election of President Barack Obama did not derail the U.S. stock market, as many investors

Year End 2012Market View

At the end of each year, REDW likes to take a look back at the major issues that either did or were expected to have an impact on the stock markets, just to bring the world back into perspective. So what were the issues that most preoccupied the financial media? What impending disasters prompted investors to reduce their exposure to stocks, if not abandon the stock market completely?

Well, most recently, there was the inevitable plunge off the fiscal cliff. Investors were imagining a car careening off a cliff, crashing into the Grand Canyon, and exploding in a ball of fire and smoke. It didn’t quite work out that way. Earlier in the year there was the doomed Euro zone, which had many experts predicting a complete collapse. That never panned out either, but there are still some concerns, so

Not Bad, for a Year When the World Was

Supposed to End!

Copyright 2012 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only.

The information contained does not constitute legal financial, accounting, or other professional advice.

By Jude V. Gleason, CFP®, AIF®, MBA Chief Investment Officer

so patience is truly a virtue! So exactly how did the world markets fare last year? For the year, total return was 16.42 percent for the MSCI World Index in local currency, and 16 percent for the S&P 500 Index. Among 45 global stock markets tracked by MSCI, only three posted negative results in local currency (Chile, Israel, and Morocco), and 12 markets had total returns in excess of 25 percent, with Turkey leading the pack at 55.8 percent. Although much of the financial news over the past year highlighted Europe’s fragile financial health, most of the region’s equity markets outperformed the US, including Austria, Belgium, Denmark, France, Germany, the Netherlands, Sweden, and Switzerland. For U.S. dollar-based investors, results were further enhanced by a modest decline in the U.S. dollar relative to the Euro, the Danish krone, and the Swiss franc.

So what does 2013 hold in store for the local and world stock markets? My crystal ball remains cloudy, and I have yet to come across a psychic who is reliable enough for market predictions, so as I’ve done in the past and will continue to do going forward, I’ll resort to examining the fundamentals. Looking at six key valuation measures for the next 12 months, the market still looks somewhat undervalued. The forward Price to Earnings ratio (P/E) is 12.5 compared to a 15-year average of 16.7. The Price to Book (P/B) is 2.3 versus the 15-year average of 3.0. Cash Flow is a measure that analysts are always concerned with. The reason being is that the old adage is true: it takes money to make money. If a company doesn’t have cash to run its operations, market its products, and take care of day-to-day functions, then having the best product or the best idea in the world does no good and the company goes bust. So the forward Price to Cash Flow (P/CF)

measure is 8.5 compared to the 15-year average of 11.0. The Price to Sales ratio (P/S) is 1.2 versus the 15-year average of 1.5, and the much-watched PEG (Price/Earnings to Growth) is 1.3 versus the 15-year average of 1.5. The PEG in this instance is calculated by dividing the P/E ratio by the 12-month expected growth rate. The lower the PEG, the more undervalued the market. The final measure of interest is the Dividend Yield on the S&P 500 index. The current yield is 2.4 percent versus the 15-year average of 1.9. There are two reasons why REDW sees this measure as significant: 1) larger companies that pay a regular dividend will see the dividend yield increase when the stock price trends lower, which usually indicates it is now a value; and 2) the S&P 500 dividend yield is higher than the ten-year treasury yield, which stood at 1.78 on December 31, 2012. Investors who have ten years before they need or expect their money back are usually willing to invest it in stocks if they can get a higher yield on their investment and the possibility of price appreciation.

As you can see, our analysis of the fundamentals leads us to be somewhat optimistic. The market may not be extremely undervalued, but it is undervalued nonetheless according to our data. We also believe that when the markets are recovering from a downturn and are trending upward, they rarely stop when they meet fair value, so we expect that the pendulum will continue to swing beyond fair value into overvalued territory before it is time to become really concerned. Based on our overall analysis, we believe the markets will be moderately higher in 2013, continuing their advance through 2014.

the inevitable stock market plunge that would surely come after the markets had realized double digit gains. After all, that is a dominant characteristic of the new normal: the markets would forge ahead, only to give most, if not all, of it back and leave investors with an insignificant return UNLESS she/he took action. We were told that the return would not justify the risk we were taking. We were told that the market would take too long to recover because bond returns would remain in the 2 to 3 percent range and equities would be in the 5 to 6 percent range. At that rate, a 40 to 50 percent decline like we experienced on some stock market indexes in 2008 would take 12 years or more to get back to where they were before everything came apart, and that is just not acceptable. How has that New Normal worked out?

After four-and-a-half years, the cumulative wealth of an S&P 500 strategy with dividends reinvested reached an all-time high in March of 2012, and the index closed 3.3 percent higher than that for the year. Four-and-a-half years to recover from one of the worst financial melt-downs in U.S. history is not bad. Many investors compare 2008 to the Great Depression of 1929, so how does this recovery compare? It took the market 15.4 years to recover from that carnage. Maybe the markets are more resilient than the pundits give them credit for being, and maybe things have not changed quite as much as they thought. The chart on the next page supports this premise. Our philosophy at REDW Stanley has been, and remains, that holding good investments, remaining patient and giving the markets time to work through their ups and downs pays off. Clients who followed our advice and stayed the course through the tough times have been handsomely rewarded,

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Copyright 2012 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only.

The information contained does not constitute legal financial, accounting, or other professional advice.

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Market Cycles Based on Month-End Value of S&P 500 Index with Reinvested Dividends

Peak Month Trough Month Loss at Trough Recovery Month Years to Recovery

Oct 2007 Feb 2009 -50.9% March 2012 4.4

Mar 2000 Sep 2002 -43.8% Oct 2006 6.6

Aug 1987 Nov 1987 -29.5% May 1989 1.8

Dec 1972 Sep 1974 -42.6% Jun 1976 3.5

Dec 1961 Jun 1962 -22.3% Apr 1963 1.3

Feb 1937 Mar 1938 -50.0% Mar 1944 7.1

Aug 1929 Jun 1932 -83.4% Jan 1945 15.4

2012 Index and Country Performance

Total return (gross dividends) for 12-month period ended December 31, 2012

MSCI Index Local Currency USD

WORLD 16.42% 16.54%

WORLD ex USA 16.73 17.02

EAFE 17.89 17.90

EMERGING MARKETS 17.39 18.63

EMERGING + FRONTIER MARKETS

17.15 18.35

TURKEY 55.80 64.87

EGYPT 54.66 47.10

BELGIUM 38.56 40.72

PHILIPPINES 38.16 47.56

THAILAND 30.84 34.94

DENMARK 30.37 31.89

GERMANY 30.07 32.10

INDIA 29.96 25.97

HONG KONG 28.01 25.97

POLAND 27.05 40.97

AUSTRIA 25.07 27.02

SOUTH AFRICA 25.07 19.01

COLOMBIA 23.87 35.89

SINGAPORE 23.54 30.99

NEW ZEALAND 23.28 30.38

CHINA 22.85 23.10

JAPAN 21.78 8.36

FRANCE 20.93 22.82

AUSTRALIA 20.77 22.30

2012 Index and Country Performance

MSCI Index Local Currency USD

MEXICO 20.09 29.06

PERU 19.73 20.24

THE NETHERLANDS 19.35 21.21

SWITZERLAND 18.91 21.47

SWEDEN 17.11 23.41

USA 16.13 16.13

FINLAND 14.71 16.50

KOREA 12.89 21.48

TAIWAN 12.84 17.66

HUNGARY 11.86 22.79

INDONESIA 11.83 5.22

ITALY 11.72 13.46

NORWAY 11.63 19.70

UNITED KINGDOM 10.24 15.30

MALAYSIA 10.23 14.27

BRAZIL 10.14 0.34

RUSSIA 9.73 14.39

CANADA 7.46 9.90

IRELAND 4.66 6.29

GREECE 4.11 5.73

PORTUGAL 3.36 4.98

SPAIN 3.12 4.73

CZECH REPUBLIC 0.26 3.48

CHILE -.014 8.34

ISRAEL -6.24 -3.91

MOROCCO -12.63 -11.48

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