2012: After All, A Dull Year

When you are working to prepare a set of pieces amounting to an 'outlook for 2013' document, one of the first things to do is to ask oneself whether this year's developments have been sufficiently benign or malign to compel you to put away the tools that worked/didn't work last year.

Now there are good reasons why economic commentary still tends towards the alarmist:

• Western governments still show no recognition that post-war fiscal policies have edged them towards bankruptcy (or over it, in some cases) - and there is no discernible voter recognition of it either;  
• there is also no acknowledgement that the flaws  in the structure of the world's financial institutions are fundamental, anachronistic, and fixable; 
• the jury is still out on whether China can make the historically-treacherous traverse between a financial repression/exogenous growth model and a fi  nancially liberalized/endogenous growth model;
• and the populations that drive world growth are still getting older. . . . 

So there's plenty to worry about. But since the Crisis of Western Financial Institutions, public discourse has rarely been less than apocalyptic. (Those in need of a regular fix of fire and brimstone could do worse than scan InvestmentWatch).  Whilst I strongly believe that the next 30 years will look very different to the last 30, it's not clear to me that the worst-case scenarios are the most likely.  (But then I grew up fretting about nuclear war, the imminent onset of the next ice age and Britain's actual bankruptcy.)  In fact, it is not  difficult to find reasons for  long-term optimism - it's just difficult to have them heard.

What's more, despite the background blizzard of intensely gloomy commentary, the fact remains that 2012 has been a noticeably dull year financially.

Take currencies: against the US dollar, the Euro has edged up 0.2%, Sterling is up 3.3% and the Yen down 4.8%.  Measured against the SDR basket,  the dollar looks likely to end the year within a percentage point of where it started.

And it's a similar story for world stock markets. Take the MSCI World Free Index - it's up 11.1% so far this year, which is a boring  0.23 standard deviations above the 1992-2012 mean average gain of 6.8%.  In standard deviation terms, the S&P has managed a gain 0.21SD above average, the gain for EuroStoxx is 0.16 SDs above average, for the Hang Seng 0.19SDs, Topix 0.32 SDs, for the FTSE 100 just 0.03 SDs above, and the Kospi's 6.6% gain on the year is 0.14SDs below the average. As the chart below shows, for equity markets, the years since 2009 have been, above all else, just lacking in volatility. 

To make matters even less interesting, globally markets have clustered to almost historically high levels of performance correlation.  One way of displaying this is to calculate the standard deviation of annual movements among international markets (in this case, S&P 500, EuroStoxx, TOPIX, FTSE 100, Hang Seng and Kospi).   So far this year, the standard deviation between index movements since the beginning of the year is just 5.7% - only in 2004 has it been lower.  

In short, this was a year to shut down your hedge fund. 

Even so, there are two ways to look at this dullness.  One can either say that financial markets are dismissing  2012's apocalyptic warnings and assuming that 2013 will simply extend the mix of mutedly positive trends currently visible against the gloom, or that 2012 was simply 'the lull before the storm'.