Investment management for institutions and high net worth individuals.
In 1997, three Chicago investment managers with a desire to provide a more personalized level of client service joined together as Dearborn Partners LLC.
An independent, privately held firm based in Chicago, Dearborn Partners has 36 employees and manages assets for 40+ institutional and 200+ private clients.
Commentary
2011 Fourth Quarter
The 2011 price performance of the US stock market was among the best in the world. However, total return (price change plus dividends) of the S&P 500 only advanced 2.1% with the price remaining unchanged for the year. The equal-weighted index of the S&P 500 advanced a mere 0.01% for 2011. Mid and small-cap stock indexes were little changed for the year. The S&P Small Cap 600 Index rose 1.0% (total return) and the S&P Midcap 400 Index declined -1.7% (total return). International investing faired poorly in 2011. A sampling of key 2011 foreign market returns (price only) saw Switzerland -10.9%; Germany -16.3%; China -17.9%; Brazil -19.3%; and India -30.2%.
The best performing US equity sectors during 2011 were the defensive components of the market, consisting of utilities, healthcare and consumer staples. These sectors typically possess less economic sensitivity, lower exposure to foreign sales and higher dividend yields. These traits were particularly attractive during a period of worldwide economic uncertainty and record low interest rates. Correspondingly, the worst performing sectors by a large margin were the highly economically sensitive areas of the market. These were the basic materials, financials and technology groups.
The extreme volatility in the 2011 daily stock price movement reflected several key concerns surrounding the future growth of the global economy. These were consistent themes throughout the entire year. The markets appeared to focus on three major events: (1) The governmental budget deficits in Europe (particularly Greece) and its ripple effect on the Euro currency and future economic growth in Europe; (2) The stalemate in Washington DC and its impact upon business confidence and the growth of the US economy; and (3) the concern about the slowing economic growth in developing economies and particularly China. The common thread of all these macro events were centered upon their impact on future global economic growth. Slower economic growth normally would mean reduced earnings and dividend growth projections. Both the world stock and commodity markets dramatically vacillated in direct response to these macro events.
The US economy has shown some signs of improvement during the 2011 fourth quarter. US GDP growth was only 1.3% in the second quarter and 1.8% during the third quarter. However, consensus forecast expect 2011 fourth quarter to have grown in the range of 2.5%. European GDP essentially showed no growth for the second and third quarter of last year. We expect European fourth quarter GDP growth to be negative, reflecting a recession that should last for 2012. Unemployment in the European Union is currently 10.3% and is expected to rise for most of 2012. Economic growth in China is still good, but less than was reported in the prior quarters. China recently reversed its restrictive monetary and fiscal policy in an attempt to overcome slowing export demand, especially from the European Union - China's largest trading partner.
Concerns persist surrounding the US consumer. US unemployment rate declined during the last quarter to 8.5% from 9.1%. However, unemployment still remains quite high. Average wages and household income continue to be flat and have decreased after the impact of inflation. High energy prices and food inflation continue to limit the growth in discretionary income, even though energy prices are reflecting some modest contraction. Corporations are still hesitating to hire new employees given the uncertain macro, regulatory and economic environment.
The yields in the US fixed income markets continue to remain at historic lows. The 10 year Treasury yield fell from 3.2% at mid-year to finish the year at a yield of 1.9%. Bond yields receded for three primary reasons - (1) Investors flocked to the safety of Treasuries and other high quality bonds during these precarious times; (2) The Federal Reserve was still keeping short-term rates low to stimulate the economy; and (3) economic growth remains sluggish with relatively low inflation.
On the positive side, we do expect another decent round of earnings reports to begin towards the end of January. The growth in 2011 fourth quarter earnings will decrease from earlier in the year due to a decline in some commodity prices and slower export demand. The focus on corporate guidance for 2012 will be very important. We expect the 2011 S&P 500 earnings to hover in the range of $98 per share, which would be record earnings. Our initial forecast for 2012 S&P 500 earnings is $105 per share. The consensus earnings estimate is currently $110 per share, but trending lower due to weakening commodity prices and slowing global growth. The implied price/earnings ratio for the S&P 500 is 12 times (plus a current dividend yield of 2%). This is a reasonably attractive P/E compared to 10 year treasury yields of 1.9%.
The higher quality companies that dominate our portfolios continue to generate improving free cash flow with earnings/dividends generally advancing at a much faster pace than inflation. Balance sheets are the best that we have seen in years due to higher capital positions, lower cost of carrying debt, as well as lower debt levels. Productivity remains high and profit margins reflect managements focus on cost containment. We believe that with some clarification of the macro concerns, stocks are positioned to improve during 2012.