It appears that currently there is a heightened list of worries which could cause even the most sanguine investor a bit of discomfort. However, history and our research suggest that most of the obvious concerns and worries (like those listed above) are the ones that investors should be bothered by the least. Why? Because stock markets are very good at digesting potentially bad news and determining the extent and responding accordingly – way before the investing crowd is aware. Support for this concept can be found in the fact that stock markets begint heir descent prior to economic recessions (when no one is worried) and historically rebound before recessions end (when everybody is worried). Another example was the infamous Y2K scare at the end of 1999 when it was assumed that all computers would stop working at the turn of the new year. We recall investors fleeing stocks at that time (as they were rising), only to find that the New Year came and went without a hitch. These are some of the reasons that many seasoned investors suggest that stock markets are a discount mechanism – meaning that all of the current and future good or bad news is already built into the price of securities.

It is with this concept in mind that we would suggest that all – or most – of the bad news about the fiscal cliff etc., etc., is already reflected in the price of global markets and stock prices – and those prices on balance have been rising in the face of these challenges – suggesting that most of these problems will likely be resolved with less drama than the media would suggest. We therefore advocate that investors remain invested during this time in high quality companies that generate above average profit growth. Our research particularly finds better value in areas outside the US, suggesting that 2013 may be a year that being a global investor will be highly rewarding.

Even if one is not convinced by the above concepts in regard to equity markets, there are a number of other even more convincing arguments to be a global stock market investor today. These include the long term valuation of stock prices versus earnings and the degree to which individual investors are participating in today’s marketplace. On the first note, as we have expressed throughout the last year, stock prices relative to earnings are historically cheap. This is a result of equities underperforming for the last 12 years – what has become know as the "lost decade." Though most stock prices are at about the same level as they were in 1999, the underlying companies are earning three times as much in profits. The last time this valuation phenomenon existed – in the late 70s – it led to a powerful multi year advance in stock prices – one investors should not have missed. In addition to the valuation phenomena discussed, we have reached historically low levels of individual participation in the stock market. Historically, individual investors pile into stocks right before prices fall off a "cliff" and tend to do the opposite before stocks take off"…one more sign that stocks at these levels look attractive.

Though we continue to be optimistic during this period we are also aware that there are issues that could come as a surprise – not in a good way. Therefore, we continue to manage the risk of your investment portfolio through your overall allocation to stocks, economic sector exposure and the use of carefully placed stop loss orders on those positions that we feel would be vulnerable in a significant market decline.

In recent years, global stock markets have been extremely volatile causing us to take preventive measures a number of times to reduce your exposure to catastrophic decline. This has allowed your investment portfolio to be less volatile than market indexes while still achieving positive rates of return. Going forward, due to the factors discussed above, we envision a market climate that will require less necessity to take such preventive measures and allow you to have attractive long term returns. We look forward to this new era.

If you have questions, would like to get together for a portfolio review or you have experienced a change in your financial circumstances, please let us know. All of us on "the team" wish you and your family a happy and safe New Year!

Sincerely,

Your Team at Main Street Research