As we start a new year, many are asking what the unprecedented events of 2011 mean for investors in the months ahead. Last year was marked by unprecedented volatility. The U.S. stock market is within very short striking distance of where it started a full year ago, having traveled multiple round trips. The broad U.S. bond market, measured by the Barclays Capital U.S. Aggregate bond index, delivered a nearly 8% return last year. If you were invested elsewhere, you were likely not so lucky, with European markets in particular having demonstrated fragmentation once deemed unthinkable. More important, last year was marked by unprecedented volatility. For instance, the number of days the Standard & Poor"s 500 index moved more than 2% was 35, more than twice the average since 1927.
All of this has implications for institutional and individual investors alike, as well as the asset management firms they hire to invest on their behalf. Welcome to the Age of Austerity.
How did we get here? Last year's events in Europe and the U.S. speak to the enormous buildup of debt over a number of preceding years. The headwinds of the European debt crisis, the fright in the municipal bond market and the downgrade of the U.S. sovereign rating have buffeted many investors.
We are in a period of transformation. We are exiting the Age of Entitlement that was characterized by leverage, lax lending standards and the general belief that trees and home prices grew to the sky. The Age of Austerity that is now unfolding is consequential for investors of all types. Balance sheet strength and fiscal responsibility will be emphasized. As we traverse this secular journey, the process will not be easy. There will be winners and losers, and the risk of unintended consequences will be high.
Here are some highly probable outcomes: