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Nauset Market Commentary — Quarterly

The following Market Commentaries are part of clients' quarterly reports.

Fourth Quarter 2011

January 15, 2011 :: Volume 12, Number 4

Market Performance Recap: Stocks Recover as Eurozone Fears Subside

As eurozone debt crisis fears abated in October, stocks staged a sharp rally. This led to a +12.0% Q4 gain in the Dow Jones US Total Market Index, and a flat 2011 return of only +0.5%. International stocks were only slightly higher up +2.9% for Q4, but finished the year down -14.8% as measured by the MSCI EAFE Index. Bond prices were mostly flat for the quarter, and the Barclays Intermediate Gov/Credit Index finished 2011 with a solid +5.8 gain.

Annual Stock Outlook: Tough Headwinds Create Caution

Our annual outlook for US stocks focuses on the three factors that we believe determine investment attractiveness: corporate profits, interest rates, and valuation levels. This year’s outlook is particularly difficult given the high market uncertainty.

  • Corporate Profits – After several years of stellar profits, we believe overall profit gains will be at or slightly below historic averages of 10% due to slow global growth; a neutral to slight negative for stocks.

  • Interest Rates – We expect interest rates to remain low for the year with some risk for an uptick in the latter half if eurozone problems abate and US economic growth exceeds 3%. This is a slight positive for stocks.

  • Market Valuation – We see the market as fairly valued given global risk factors, which is a neutral for the market. How those risk factors – eurozone debt, sluggish global growth, US housing and election year uncertainty – evolve and unfold this year may hinder or help valuations.

In summary, we are neutral to cautiously positive on stocks given recent economic momentum. We will closely monitor the aforementioned myriad of global and domestic fear factors and adjust accordingly. Our current investment strategy is slightly defensive with emphasis on high quality and high dividend US stocks, combined with a mix of yield securities, including floating rate and high yield bonds, and multi-sector bond funds.

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Nauset Wealth Management, an SEC Registered Investment Advisor, was founded in 2000 by Michael Lombardo. Nauset provides comprehensive financial planning and investment management services to families and individuals, and currently manages over $60 million. All services are provided on a fee-only basis with no conflicts of interest. Nauset does not sell financial products, nor do we take any commissions or referral fees.