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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Year in Review & 2013

December 31st 2012 After a number of years with plenty of volatility, 2012 was a relatively smooth ride. To start the year, the major averages barely corrected more than 1% running up an impressive double digit return through April (Thank you Apple). The old adage, sell in May and go away worked again for the third straight year. A 10% correction in the month of May provided the only down month through the first three quarters. Two rocky summers in a row led to a smooth ride this year as many investors and brokers were able to take a summer vacation without worrying about the markets or being called back to the office. The relatively smooth ride for the markets this year could be attributed to the Federal Reserve keeping the pedal to the metal regarding quantitative easing. These policies have keep interest rates unusually low. While many argue the Fed's policy hasn't worked, it did finally stabilized the housing industry giving the banking industry a much needed boost.

Having said that, the housing and financial sectors have performed phenomenally well this year. The financials were the top performer this year rallying 27% and yet remain one of the cheapest sectors with a PE just over 11. The housing stocks or home builders may be due for a breathier, but the fundamentals remain strong.

Other sectors poised for growth in 2013 are the cyclicals. Not only has our Federal Reserve been keeping interest rates low, but Central Banks around the globe including China and Brazil have cut rates to spur growth. The economic numbers coming out China have been encouraging of late indicating the country has avoided a hard landing and is starting to grow once again. This would be good news for material, industry, and energy stocks that have lagged the last several years. Energy was the second worst performer this year and yet the cheapest on a PE basis. Stocks in these sectors starting to perk up include CAT, CMI, HES, CLF, FCX, XOM, DE, COP, & NOV.

Consumer Discretionary or retail had a phenomenal year rallying over 20%. However the retailers are the third most expensive sector behind the consumer staples and telecom. Utilities are the fourth most expensive sector and yet the worst performer this year. Consumer staples and discretionary may underperform in 2013.

One category to clearly be concerned about in 2013 and 2014 is the bond sector and in particular the Treasury bond market. Bonds have been in a bull market for 30 years as interest rates kept pushing lower and lower thanks in large part to the Federal Reserve.
Investors are not prepared for the eventual bear market in bonds. Inflows into bond funds overall (which includes both taxable and tax-exempt fixed-income funds) are set to exceed $350 billion this year, compared with just over $400 billion in 2009. With rates near zero, interest rates have nowhere to go, but up. The 14% return for the S&P 500 hasn't impressed investors as nearly $115 billion has flowed out of equity funds since the start of the year, surpassing the record $108 billion that flowed out of them during all of 2008.

In summary, hopefully 2012 signaled the start of a new bull run for global markets. If this is true, cyclical stocks and cyclical sectors will come to life as they have in the month of December. Consumer Discretionary and Consumer Staples and Utilities may underperform in 2013, although the excellent dividend yields within the Utilities and Consumer Staples should limit any downside. The same cannot be said for most bonds funds in the coming years. Interest Rates have nowhere to go but up which is not good for bonds prices.