We’ve all heard that patience is a virtue. However, over the past decade it seems like everyone in the investing community has been determined to make short-term and reactionary tactical decisions in an effort to receive instant gratification. In the 1960s, the average holding period for stocks on the NYSE was 100 months compared to present day where it is a mere nine months. Investors now view a strategic long-term plan in the context of a few months instead of years. This thinking is clouded by the recent volatility in the market and the mentality that “this time it’s different.”

From the beginning of October to the end of January, the S&P 500 gained almost 20%. In fact, it was hard to find an area of the market that didn’t produce meaningful positive returns.Those with macro forecasts most certainly did not predict the recent rally we experienced. However, investing is riddled with uncertainty and it is better to invest based on value relative to long-term trends rather than the ever changing macro-economic forecasts. This desire for patience does not simply mean one should sit idly. It means we must be careful and methodical in our approach to allocations and pay strong attention to true value that eventually gets reflected in prices. Investing is a long-term game where patience is one of the key qualities of success.

In January, markets experienced stellar returns. However, they somewhat mask the underlying macro uncertainty continuing to dominate the investing landscape. The U.S. continues its slow expansion and recovery. Economic and political unrest remain in Europe and there are still concerns of its affect on the rest of the world. The attractiveness of stocks over bonds is tempered by the tail risk presented by the European situation. We remain neutral with regard to overall stock exposure, with a tilt towards the United States and beaten-down emerging markets.

To read the full Market Pulse Report, please click here.

2011 was a year of risk aversion, as investors flocked to the relative safety of U.S. large cap stocks, bonds, and gold while grappling with uncertainty in Europe, political dysfunction in the U.S., slower growth in emerging markets, and fallout from the Japanese tsunami and Arab spring. While bonds posted tremendous returns and the U.S. stock market ended the year almost right where it started, most other asset classes languished—in some cases meaningfully so. This trend continued in the fourth quarter, though international stocks were able to at least post relatively modest gains.

The sovereign debt crisis in Europe continued to dominate the forefront of investor sentiment; however, there were also some encouraging economic data points coming out of the United States. The U.S. unemployment rate has dropped to its lowest level in nearly three years. Consumer confidence, meanwhile, has rebounded to near its post-recession high, though it remains well below the levels signaling a healthy and stable economy.

Stocks rallied substantially in the fourth quarter, but the difference in outlook for the U.S. and Europe was reflected in equity market performance as it had been throughout the year. All major U.S. indices gained in excess of 10% during the quarter, buoyed by improving economic data, healthy corporate balance sheets, and reasonable-to-cheap valuations. Europe and emerging markets gains were more modest—5.4% and 4.4%, respectively. Japan was a laggard during the quarter, declining 3.9%. Correlations between stocks and asset classes remain elevated, reflecting the macro-driven risk on/risk off environment. Investor demand for U.S. credit was strong as the Barclays U.S. Aggregate Bond Index gained 1.1% and the Barclays High Yield Index rose 6.5%. U.S. Treasuries were a standout performer for the year, gaining almost 10%.

Commodity markets did not participate in the equity market rally during the fourth quarter, due in part to the rise in the U.S. dollar, concerns of a global slowdown from the situation in Europe, and falling demand from China. Though gold lagged during the quarter, declining 5.5%, it finished 2011 at $1,566 an ounce, resulting in a 10% gain for the year.

To read the full Quarterly Market Overview, click here.

The S&P 500 index rose again this week (+1.7%), bringing the return up to +4.6% for the first three weeks of the year. After suffering sharp losses in 2011, financial stocks have led the rally with many of last year’s worst performing stocks enjoying big gains. Bank of America, which lost 58% last year, is up over 24% to start the year. Financial stocks have moved higher as economic data continues to point to moderate economic growth and the situation in Europe potentially stabilizes. A number of S&P 500 companies have begun announcing fourth quarter earnings and the results have been mixed so far. Most of the large U.S. banks reported positive earnings this past week, which helped boost stock returns.

Stocks in Europe have also rallied to start the New Year and hit a five month high this week. The Stoxx Europe 600 Index is up +5.6% already in 2012, its best start since 1987. Greek and European officials met with private creditors this week in order to negotiate the terms of a debt swap, which would effectively exchange the existing bonds for new securities and include a significant write-down in value. Greek officials have threatened to default on a March bond payment if an agreement is not reached in the near-term.  European leaders involved in the negotiations expect a deal to be reached in the next few days. In addition to the Greek talks, economic data remains weak, leading to speculation that the ECB may reduce interest rates even further. Expectations of additional stimulus in the U.S. and possibly China have also helped fuel the rally in global stocks.

To read the full Global Financials Update, click here.

Years from now, people may look back at 2011 and conclude it was a decent year for the markets. The S&P 500 posted a modest gain and U.S. government bonds generated stellar returns. However, these good tidings mask the underlying macro uncertainty and nerve-racking market volatility that most investors experienced. For many, the key memory might be that diversification simply did not work, and any investment outside of U.S. large cap stocks or government bonds detracted from rather than added to portfolio returns. Allocations thought to be cutting edge (those including international exposures, commodities, REITs, and hedged strategies) were taken to the woodshed by “old-fashioned” approaches.

But is diversification truly dead? Only in the unlikely case that macro risks continue to be the primary driver of asset class returns, and that they keep heading in the same direction (a flight to safety toward the U.S.). Our view is that over the short-term, risk assets may flock together, but eventually differences in returns will be driven by fundamental factors (such as earnings) and valuation imbalances. Regardless, we do not look to protect portfolios only by spreading investments amongst risk assets; true diversification comes from the still-uncorrelated positions in bonds and gold.

As for 2012, we expect the U.S. will continue its slow expansion as long as Europe experiences only a modest recession and emerging market economies regain some of their momentum. If that is the case, equities, which are reasonably valued, could do relatively well especially compared to bonds. Of course, the attractiveness of stocks over bonds is offset by the tail risk presented by the European debt crisis. Given the tug of war between valuations and macro uncertainty, we remain neutral with regard to overall stock exposure, with a tilt toward U.S. dividend paying companies and beaten-down emerging markets.

To read more of the Market Pulse Report, please click here.