2011 End of the Year Report

To say that 2011 was a challenging investing year would be a understatement. We started the year with optimism based on the United States continuing to grow from the “Great Recession”. Analysts were convinced we would continue the modest upswing that began in 2010.

In fact through May 2011, the stock market had appreciated 8 percent. Then all hell broke loose. While the U.S. economy continued to modestly expand, global events to include partisan gridlock in Washington, regime changes in Egypt and Libya, the earthquake in Japan, and European sovereign debt issues, drove wild fluctuations in stocks, bonds, and commodities. 2011 was one of the most volatile years in stock market memory.

The Washington stalemate over increasing the U.S. debt ceiling brought the U.S. to the brink of default which led Standard and Poor’s to strip the country of its Triple-A Debt rating. That “shot across the bow” reduced investor confidence and led to many selling their investments for things like gold, and cash. In August the markets dropped over 4 percent. Then stocks went into a freefall losing 12 percent by the end of September. The Japanese tsunami and earthquake severely disrupted global supplies of many manufactured goods. By then the European sovereign debt crisis took center stage. Countries like Greece and Spain have significant debt they can neither repay nor grow out of. And because of the common Euro currency, the effected countries cannot craft individual national monetary policies to resolve the issue. In addition, China’s economic growth, which had been feasting on commodities and manufactured goods produced from around the world, slowed which dragged the global economy down some more.

The resultant steady stream of bad headlines sparked stock market volatility. On good news days the market would jump several percentage points while on bad news days the market dropped a similar amount. By the end of the year we finished 2011 more or less where we started. The Dow Jones Industrial Average eked out gains of 6% while the S&P 500 ended the year essentially where it started. Certainly disappointing. Of note, Hedge Funds, typically run by the smartest minds in the business recorded, on average, 5 percent losses in 2011.

Those of you who invested early in the year enjoyed positive gains before sliding back to where you started. Those of you who invested mid-year got in at the peak and endured the subsequent slide before making some of it up later in the year. Those who invested in Autumn, got in at the market lows and captured all of the upside of the rebounding markets. If there is a lesson to be learned here, it is to invest what you can, when you can, in order to take advantage of dollar cost averaging.

So what does 2012 have in store? While the crystal ball always remains fuzzy, consensus is we should expect to see more of the same for early 2012 - - Moderate growth with wiggles up and down. European sovereign debt problems will continue to percolate but it appears that initial steps have been taken to restore confidence in some sort of a solution. Similarly, in a Washington DC election year, analysts expect partisanship to decrease in favor of improved deficit and debt policy as both parties vie for the White House and control of Congress.

After a “more of the same” start, analysts remain guardedly optimistic for 2012. Today U.S. economic growth remains around 2%, unemployment is now less than 9 percent and new jobless claims are decreasing, housing construction spending is increasing, and consumer confidence slowly improving. While not dramatic, these are significant improvements compared to where we were. That being said, we still have significant headwinds with an aging population (and demands for entitlements), a weak housing sector, and significant debt and deficit spending. Estimates are the U.S. economy will grow another 2% in 2012.