REDW STANLEY FINANCIAL ADVISORS, LLC An SEC Registered Subsidiary of REDWLLC

most analysts were expecting some type of pullback. What is somewhat disconcerting is that, even though the domestic markets have very respectable returns at the halfway mark, investors seem to feel and behave like the markets are down 8.31% and 12.66% on the S&P 500 and Nasdaq, respectively, instead of actually being positive by those amounts for the year.

The reason for the extreme pessimism is the continued procrastination by the Eurozone and the European Central Bank (ECB) to put together a plan that addresses the debt crisis for all of the faltering countries, particularly the larger economies of Spain and Italy. The current concern is that a bailout of Spain would deplete significant resources and leave very little in the pot to provide further assistance to Portugal, Ireland and, more crucially, Italy.

On the domestic front, the “fiscal cliff” –the term used to describe the precarious situation the U.S. government will face at the end of 2012 – is looming large and preventing any sustained upward movement in the markets. U.S. lawmakers will have to make a choice, either to let current policy go into effect at the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to put even further pressure on the already anemic growth that we’ve seen and possibly throw the economy back into recession – or they can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the chances that the U.S. could face a crisis similar to that which is occurring in Europe.

The two main concerns are the European debt crisis, which continues to be a lingering thorn in our sides, and the “fiscal cliff,” which has risen

to top of the domestic worry list. This essay will reflect on what the markets have done so far this year, provide an update on the European debt crisis, and discuss the “fiscal cliff” and its potential impact on our economy and the markets.

So how did we do for the second quarter, and where do we stand year-to-date? The S&P 500 finished the quarter down 3.29%, which is not bad when we take into account that the S&P 500 was down nearly 10% from the first quarter close at one point in time. The year-to-date return for the S&P 500 through June 30th is a solid 8.31%. There are many investors who would be more than happy with that return for the year. The Nasdaq was down 5.06% for the quarter, but still boasts a 12.66% return through the first six months of the year. The MSCI EAFE, which represents the foreign markets, posted a three month return of -8.37% for the second quarter and a year-to-date return of 0.77%.

So, after a strong start to the year with double digit returns in the first quarter, we saw some volatility return to the markets and we saw some profit taking and downward pressure. After two strong quarters, the fourth quarter of 2011 and the first quarter of 2012,

September | 2012Market ViewNow that we’re past the halfway mark for 2012, it’s time to take a look at where we stand. Have you ever heard the saying, “There are three sides to every story: yours, mine and the truth”? It seems we need to remind ourselves of that truism as we listen to all the discussions about current and future market conditions.

If we only listen to the noise that permeates the airwaves, we can’t help but feel as though the stock markets have been on the verge of free fall, ready to plunge into complete disaster. However, a realistic review of where we stand so far this year tells quite a different story. Is it the calm before the storm? Is there any validity to this stomach pang we feel in anticipation of impending doom? Is the collapse of our capital market structure inevitable? It sure would be wonderful to write an article that assures everyone there’s nothing to worry about, but we all know that there are no guarantees when investing. What this screed will attempt to do is work through the three sides of every story to highlight the truth, which should put everything in perspective. From there, it all comes down to how each of us chooses to view the world. Those who see the proverbial cup as being half empty will continue to build a bunker in the side of some remote mountain and prepare for Armageddon, while those who see it as half full will acknowledge that there are major issues that need to be addressed, but believe that solutions will be found and that there is light at the end of the tunnel (that is not an oncoming train).

“The Third Side to The Story?”

Copyright 2011 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only.

The information contained does not constitute legal financial, accounting, or other professional advice.

By Jude V. Gleason, CFP®, AIF®, MBA Chief Investment Officer

The third side to the story—and the truth of the matter—is that no one has a crystal ball, and while we have seen better times in our glorious past, we have also seen worse times. And throughout it all, the one thing that has proven to be reliable is looking at the fundamentals of the market and waiting for reversion to the mean to occur. What this means is that, if the market is undervalued, over time it will start to move toward fair value or the mean value of returns. Most value measures on the S&P 500 are undervalued by historical standards. The forward-looking price-to-earnings (P/E) ratio is 12.3 versus a 15-year average of 16.8. The Price-to-Book (P/B) ratio is 2.2 versus the 15-year average of 3.1; Price-to-Cash Flow (P/CF) is 8.5 versus a 15 year average of 11.1, and the dividend yield is 2.3% versus a 15-year average of 1.9%. The dividend yield of 2.3% for the S&P 500 is very attractive when you compare it to the 10-year Treasury bond, which is yielding only 1.5%. That means you could lock up your money for 10 years in a treasury with no chance of appreciation, or you could invest in the S&P 500, get a 2.3% yield and a chance for appreciation over the next 10 years.

We have been falling back on the valuation sermon for quite a while, you might say, and while the upward move in the market has stalled, it certainly hasn’t retraced its steps to the downside either. The problem with relying on valuations to revert is that there is no time table or formula that tells when it should happen. Our guess is that after the devastating blow to the system we sustained in 2008, it may take longer for the reversion to the mean to take effect. Undoubtedly, the “fiscal cliff” and European debt crisis can cause havoc to the markets, but if we look back, there is always something looming on the horizon to threaten the market, and yet we always manage to weather the storm. Portfolio returns may not be at the anticipated or desired levels of high single digits to low double digit returns

over the last 10 to 15 years, but those who stuck it out are not in the negative column either.

There’s no doubt that this is a scary time to be in the market, but having talked to survivors of the Great Depression, it is clear that anytime we are putting our money on the line, it is scary and rightfully so. If it’s not scary, then something is very wrong. Investing is all about being rewarded for taking on the risk. It is our belief that investors will eventually take advantage of the valuation discrepancies noted above and opt for equities to grow their wealth, thus pushing the markets higher over time.

This problem isn’t new, and lawmakers have had three years to address the issue, but Congressional gridlock has prevented lawmakers from seriously addressing the issues. Not surprisingly, Republicans want spending cuts while continuing to avoid raising taxes, and Democrats want a combination of spending cuts and tax increases. Both parties want to avoid the “fiscal cliff,” but no one expects any compromise given recent history—especially with this being an election year.

What happens if we fall off the “fiscal cliff”? The effect could be devastating. Many economists believe that, while the combination of higher taxes coupled with significant spending cuts would reduce the deficit by more than a half a trillion dollars, this course of action would also cut gross domestic product (GDP) by an estimated 4% in 2013. With the U.S. economy expected to grow at a rate of approximately 2%, the fiscal cliff would send the GDP into negative territory by about 2% and bring on another recession. The most likely scenario is another stop-gap measure that would delay a more permanent solution, but investors have grown weary and have lost confidence in Congress, so it is not a surprise that investors are skeptical that anything meaningful will be accomplished anytime soon.

So what are the three sides to the story? The first side of the story is that investors feel the market is in a very tenuous position and could unravel at any moment, but we still have positive growth and corporate profits have been strong, so sitting on the sidelines could mean missing a market move to the upside. The second side of the story is that the economy is not recovering fast enough and jobs are not being created fast enough, so the weak economy will undoubtedly drag the market down, meaning that investors need to be positioned in safe investments with little risk and practically no return.

2

Copyright 2011 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only.

The information contained does not constitute legal financial, accounting, or other professional advice.

3

Recessionary PeriodsMid 1970s and Early 1980s

LT1396.5

Prior to 1979, there were no formal announcements of business cycle turning points.Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. For illustrative purposes only. Past performance is not a guarantee of future results and there is always the risk that an investor will lose money. Source: National Bureau of Economic Research (NBER) for economic expansions and recessions data; the S&P data are provided by Standard & Poor’s Index Services Group; US Bureau of Labor Statistics for unemployment data.

Recession BeginsNovember 1973

Recession EndsMarch 1975

Unemployment Peaks at 9.0%May 1975

Recession17 months

Recession BeginsJuly 1981

Recession AnnouncedJanuary 6, 1982

Unemployment Peaks at 10.8%Nov/Dec 1982

Recession17 months

Recession EndsNovember 1982

Recession End AnnouncedJuly 8, 1983

Recessionary PeriodJanuary 2007-December 2011

LT1396.6

For illustrative purposes only. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results and there is always the risk that an investor will lose money. Source: National Bureau of Economic Research (NBER) for economic expansions and recessions data; the S&P data are provided by Standard & Poor’s Index Services Group; US Bureau of Labor Statistics for unemployment data.

Recession BeginsDecember 2007Unemployment Rate at 5.0%

Unemployment Rate Peaks at 10.1%October 2009

Recession AnnouncedDecember 1, 2008Unemployment Rate at 7.3%

Unemployment Rate at 9.4%December 2010

S&P

500

Inde

x C

umul

ativ

e To

tal R

etur

n

Recession Ends June 2010Unemployment Rate at 9.5%

End of Recession AnnouncedSeptember 20, 2010Unemployment Rate at 9.6%

Recession30 months

Unemployment Rate at 8.5%December 2011

Unemployment Rate at 8.2%March 2012

December 2006Unemployment Rate at 4.4%

REDWSTANLEY.COM | 505.998.3200

Integrity Counts®