Horizon Advisors

The Fiscal Cliff We loudly went over the cliff and received a largely quiet and unexpected market reaction? Risk of rising interest rates After a 30 year period of declining interest rates, caution is in order. Our thoughts on portfolio fixed income positioning. The heightened awareness of uncertainty Despite lingering uncertainty investors should be committed to long term well diversified porftolios.

Investors have become cautious and anxious following the bear market of the past twelve years and the recent bouts of extreme volatility. We examine risks and opportunities in light of the difficult market environment in our special report The Danger of Safety."

The questions we hear most often from our clients have to do with the Eurozone, U.S. politics, and closely related, the so-called fiscal cliff. We thought we would approach each of these in turn.

Actively managed mutual funds greatly underperformed their respective benchmarks in 2011. This was primarily due to extreme market conditions triggered by the European debt crisis. Investment managers were not rewarded for good fundamental decision making as fear dominated trading activity in the global markets. Active manager underperformance / outperformance trends tend to be cyclical, but over time, good active managers add value. We expect actively managed funds to outperform once market volatility subsides and fundamental factors reemerge as a key consideration for investors.

Much has been made about how little the budget ceiling legislation has changed the future of our deficits. While this may be true in the short-term, it may miss the bigger point, which is that it has changed the future of our debates. There was actually a serious agreement and a new approach to reducing spending. At least we now know that this can be done. It will be up to future legislators and presidents to determine the level of follow-through, but for now, folks are focusing on the issue and we can at least acknowledge that this is progress.

After the volatility in the capital markets over the past few weeks, it is easy to forget that the market was just a hair from its 52-week high as recently as July. Then, a flurry of events has made the once happy days of spring feel like a distant memory. With the debt ceiling debate going into the eleventh hour, Standard and Poors announcing a debt downgrade, and the euro-zone debt crisis seemingly reaching a crescendo, confidence has been severely impacted and concerns over the durability of our recovery have been raised.

The economy is in much better condition than it was in 2008 and 2009. While we may have a slowly growing economy, we have successfully emerged from a very deep recession. GDP and corporate earnings have both exceeded peak levels set before the recession began. Both corporate and individual balance sheets have improved dramatically and the overall leverage in the financial system has been greatly reduced. In addition, the slow recovery is due in large part to lingering weakness in employment and housing, making further sizable declines in these vital areas of the economy far less likely.

We also think that in the unlikely event that the deadline passes without an agreement, a negative market reaction would likely force Washington to act in some fashion to quickly remedy the issue, at least for the short-term. Further, if the deadline passes, we think there will be cuts to non-essential services before we stop paying interest on our debt, triggering a default. With this in mind, and pending a resolution to this issue, we are not planning any changes in the positioning of our clients' portfolios.