The January effect was in full force to ring in 2012 with the strongest start for stocks in 15 years. True to form, smaller was better as Micro Cap Stocks led the way with a jump of 8.5%, followed by Small Cap Stocks which rose 7.5%, Mid Cap Stocks which were up 6.1%, and Large Cap Stocks which gained 4.5%. Growth stocks continued to outperform Value stocks as the former picked up 6.1% while the latter gained just 4.0%. The big winner in January was actually Emerging Markets stocks, which flew up 11.4%, while International stocks in general were up 5.4%.

On the other end of the spectrum, Long Term Government Treasury Bonds had the only red number on our sheet of benchmark returns. While a drop of 0.1% is not much of a fall, it still put an end to a nice run of positive months. For the moment, at least, the flight to quality and rise in volatility caused by the European debt crisis has taken a back seat to some decent economic news in the good ole USA. A good month for stocks is usually a good month for High Yield Bonds, and January was no exception, as they picked up 3.0%. Good news on the economy also signals that inflation could pick up some time soon, a fact that helped push TIPS up 2.4% for the month.

While the fourth quarter of 2011 was quite strong for stocks, it was not strong enough to make up for a terrible third quarter. Large Cap Stocks, represented by the Standard and Poor’s 500 Index were up all of 2.1% for the year, helping the overall market finish the year with 1.0% gain, as Mid Cap Stocks were down 1.7% and Small Cap stocks fell 2.9%. Looking at the view from the top, the final statistics would lead one to believe that it was a rather uneventful year in the financial markets. In reality, nothing could be further from the truth. Volatility was up significantly this year, in particular over the summer when the Debt Crisis in Europe stole the headlines. As far as the stock market was concerned, a few signs of an improving economy in the United States were not enough to make up for the bad news from overseas.

The best place to be invested in 2011 was actually Long Term Treasury Bonds which gained a whopping 30% in 2011. These government securities were buoyed far more by the flight to quality by investors than governmental efforts to keep interest rates low across the globe. TIPS gained 13.6% for the year, even with rather low inflation during the year. This was certainly due to an expectation of significant inflation once that once the economies of the world start to pick up steam. Interestingly, REITS actually had a nice year, as these securities gained 8.5% in anticipation of a recovery in the housing market. From a style perspective, Large Cap Growth fared the best this year, while Small Cap Value was on the wrong end of the investment performance curve.

On the other side of the spectrum, it was a difficult time to be invested overseas, thanks to a continuing stream of disturbing headlines from Europe. Not only did this take down international financial markets, the impact was even worse for US investors thanks to the rise in the Dollar sparked by a flight to quality. Developed countries were down 12.1% in 2011, while Emerging Market Equities took an even bigger hit by falling 18.4% in 2011.

Investment Returns December 2011

If you only looked at the final results, you might think that nothing happened in the financial markets during November, but nothing could be further from the truth. While the volatility was not quite as bad as August through October, the roller coaster ride in November produced similar results as Large Cap Stock investors lost only 0.2%. Once again, it was events in Europe that influenced financial markets all over the world. The US economy continues to show some signs of improvement, domestic markets are still being held hostage by events happening overseas.

In the end, not much happened to stocks in November. All categories of US stocks lost less than 1.0%. The biggest hit domestically was taken by REITS, which fell 3.8% for the month. Interestingly, High Yield Bonds had a tougher month than stocks, dropping 2.2%, thanks to the flight to quality that drove up Long Treasury bonds by 2.7%.

International stocks had a significantly more difficult month than those in the United States. Emerging Market Equities fell 6.7%, while the overall international market fell just 4.8% in November. You should continue to take the opportunity to rebalance your portfolio to its target allocations on those occasions that stocks react poorly to events over in Europe.