2012 market "shockers" have lessons for 2013
(MoneyWatch) Last year will go down as one replete with political and government dysfunction both in the U.S. and abroad -- and an impressively strong stock market. U.S. stocks in 2012 rose 16.45 percent as measured by the Vanguard Total Stock ETF (VTI), and international stocks rose 18.62 percent, as measured by the Vanguard Total International ETF (VXUS).
To that end, here are three additional facts about the stock market's performance in 2012 that might take some people by surprise.
Europe was the star. While international stocks bested U.S. stocks, regions around the world were not equal when it came to investments. Pacific rim stocks gained 15.86 percent, emerging markets were up 19.22 percent and Europe came in at No. 1 with a 21.55 percent gain (All of these are measured by the corresponding Vanguard index funds.)
How could Europe -- the part of the world with the slowest growth and that remains beset by an economically calamitous sovereign debt crisis -- end up being the star? Simple -- there is a slight correlation showing that countries with slower growing economies make for faster growing stock markets. Europe is the equivalent of a collection of "value" countries, which is similar to the data showing that value companies usually outperform "growth" companies in stock appreciation.
Still not convinced? Consider that Europe was also the strongest performing region outside of the U.S. in 2011. And what was the strongest performing country in 2012? Greece -- the ultimate value country, where stocks were up a whopping 36.48 percent on the year.
Gold closed way below its 2011 high. Though gold had a pretty decent year in 2012, rising 8.7 percent, that's only about half the gain of stocks. Further, the $1,664 an ounce closing price represented a 13.3 percent decline from the high set on Sept. 6, 2011. How can this be given that 2012 was a year of record deficits, and even a growing belief that currencies like the U.S. dollar and the euro were doomed?
The answer again is as simple and unavoidable as the laws of gravity: What goes up must come down. No financial asset rises in value forever. The expected collapse of these currencies also represented the conventional wisdom, which is nearly always a fools game when it comes to investing.
Dividend stocks were dogs. The Dow Jones U.S. Dividend 100 index gained only 11.61 percent in 2012 (This return includes the dividends being reinvested.) While that's a respectable number, it's nearly five percentage points less than the overall U.S. stock market's gain for the year.
This also shouldn't be a surprise considering that it's not exactly a secret that total return is more important than just the return from dividends. Sometimes, dividend stocks outperform the stock market as a whole, but investors that count on this year after year are sure to be disappointed.
Sadly, many investors remain in denial, as I have learned when pointing the fact out to clients that their high dividend-paying stocks have underperformed. The response I often hear is, "I don't care -- I'm collecting a great dividend." Such fantasies are tough to kill.
These are only three example of market "shockers" that, in fact, aren't in the least bit shocking when one is ready to look at the underlying data and recognize that the market doesn't run on conventional wisdom.
When you invest for 2013 and beyond, ask yourself if your logic on selecting where to invest is already known to most investors. If the answer is yes, you may want to pick a new strategy.