As it likes to do, the market proved just about everyone wrong this year. For 2011, it achieved this end simply by finishing the year right where it started. There were some bumps along the way, but the S&P 500 ended 2011 almost exactly flat, down 0.02%. The European debt crisis was the big story, and will continue to dominate financial headlines in coming months. This week’s chapter offered cause for both hope and fear. Relatively successful debt auctions in Italy were followed by a Spanish announcement that its deficit was worse than projected. US government bond prices finished higher for the week, capping another big year. The ten year Treasury ended the year with a yield of 1.88%, near historic lows despite continued signs of improvement in employment and housing.
S&P 500: 1,257 (-0.6%)
MSCI EAFE: +0.6%
US 10 Year Treasury Yield: 1.88% (-0.15 bps)
Gold: $1,563 (-2.7%)
EUR/USD: 1.2942 (-0.8%)
- Tuesday – US unemployment for November reported at 8.6%, the lowest in over two years.
- Wednesday – Italy successfully auctions 3 year debt, at a rate of 5.6%.
- Thursday – Italy sells 7 billion Euros of long term debt, paying about 7% for its ten year bonds. The auction is considered a mild success.
- Thursday – Pending US home sales increased 7.3%, well above expectations.
- Friday – Spain announced it would miss its budget target and will implement new spending cuts and tax increases in an attempt to reduce its deficit.
Despite talk of “huge” volatility and supposed “catastrophic” contagion from Europe, the US stock market finished 2011 about as flat as possible. Yes, there was a 20% decline from peak to trough during the summer, but moves of this size are historically common. Contrary to common perception, it has not been an exceptionally volatile year.
But everyone thinks volatility is high and there is palpable sense of fear—this seems bullish to us. Europe will be bumpy and probably suffer recession. Tension with Iran will likely increase and could be become an important story. China will continue to come to grips with its massive bad-debt problem. Meanwhile, the global economy should grow anyway. The US is likely to benefit greatly from a slowly recovering housing market. Importantly, most major central banks have been almost unimaginably accommodative since the 2008 financial crisis began. All of this liquidity will eventually flow into asset prices. At least some of that should impact stocks positively, though the timing is very difficult to predict. As we enter 2012, we see no reason individual investors should veer from their long-term, globally diversified asset allocation targets.
Looking back, the turning of the calendar marks a good time to reflect on what was in the news this year. Far from complete, and in no particular order, we had: European debt crisis, the Arab Spring, US debt downgrade amid a near government shutdown, Japan earthquake/tsunami/nuclear tragedy, the Charlie Sheen escapades, killing Osama Bin Laden, Occupy Wall Street, Weiner’s tweeting follies, Steve Jobs death, overthrow of Libya and death of Gadhafi, the Royal Wedding, the Casey Anthony trial, and Kim Kardashian’s 72 day marriage. Summing it all up, perhaps a flat year in the equity market seems about right after all.
Have a very happy, peaceful, and prosperous New Year.