An eventful year ended in an eventful way with the passage of the 2012 fiscal cliff legislation during the first days of 2013. The year also saw strong equity returns at a time of mediocre economic growth.

Largely lost in the dialogue, but extremely important in my opinion, is the fact that there has been some pretty good management by many business leaders. Facing uncertain political, regulatory and economic conditions, I believe such leaders executed careful and effective operating strategies. The sustainable nature of this work was not lost on the markets with the S&P 500 Index (SPX) gaining 16% for the year.

Apple (AAPL) gained enormous attention in the form of very strong gains as the largest position in the S&P 500. It is highly unusual for a single stock like Apple to make such a large impact in any one year.

The performance of the equity markets last year also had something of a cyclical recovery element with the Fed and other central banks executing very aggressive monetary policies and what I believe to be remarkable recoveries made by the likes of Bank of America (BAC), Citibank (C) and AIG (AIG) that were clinging to life support not long ago.

Lastly, European financial problems appear to have quietly eased for now. But troubles in Europe have a tendency to come back from time to time. This probably won’t change, in my opinion. Outside of these investment positives, the cautious nature of business created a less than robust level of job growth.

The recent passage of tax measures is not the end of political issues. Ahead of us lies another debate and a likely battle over government spending and authorization to increase the government’s borrowing limit. This comes at the heels of an election that maintained a politically divided government which will likely limit the passage or intensity of measures desired by either party. I don’t think the severity of today’s negatives are any worse than those faced in 2012.

In 2012, the markets were able to do well with the Fed remaining a positive element, managers doing their jobs, and the economy growing, albeit at a slow rate. This may also be the template for 2013 within the specter of unknowns that always seem to come up. There is, however, a difference to 2012 in the form of recent legislation that made tax rates permanent (permanent meaning that there are no expiration dates as implemented in prior legislation) on capital gains and dividends.

Though higher, such rates remain very favorable to ordinary income rates which I believe should be attractive to investors and helpful to investment valuations. It is also worth noting that people remain rather pessimistic as investors maintain sizable balances in bond funds and most institutional asset allocation targets remain at conservative levels.

Such pessimism is usually a good sign for the equity markets, in my opinion.  As for the bond markets, rates remain unattractive but I believe they are probably going to remain unattractive with the Fed openly stating that unemployment must show a sustainable decline before any normalization occurs.

In summary, I think there is room for optimism in the long-term investment outlook for equities. There are, however, some near-term concerns with earnings and economic outlooks affected by recent and upcoming political uncertainties.

I think it is good that the upcoming debt ceiling negotiation has already captured some market attention. It will probably get more attention but an overly adverse outcome is unlikely in my opinion.

The investments discussed are held in client accounts as of December 31, 2012. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.

Gregg Giboney

Within the Timberline Dividend & Growth strategy, Timberline takes significant measures in the management of portfolios and the integrity of…

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About Covestor Ltd. (http://covestor.com) Covestor allows its clients to mirror the investment strategies of proven investors within their own brokerage account. Covestor Model Managers license their investment strategies to Covestor and establish an investment model with Covestor. Covestor Ltd. is a registered investment advisor. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to covestor.com or contact Covestor Client Services at (866) 825-3005, x703