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BALTIMORE
— Investors had plenty to keep them jittery in 2011.
There were the earthquake and tsunami in Japan, economic
woes in Europe, and, here at home, politically tinged
fiscal showdowns in Washington over deep government
spending cuts.
Still,
the stock market entered 2012 in a spot that wasn’t
too different from late 2010.
Looking
ahead, economic and stock market observers see
uninspiring U.S. economic growth, financial problems in
Europe, and the health of Far East markets looming large
in investors’ minds. The stock market has come a long
way since it toppled three years ago, but the future
remains cloudy, they said.
“At the
end of the day, the largest economy in the world, the
U.S, continues to recover,” said Alan Gayle, senior
investment strategist with RidgeWorth Investments in
Virginia. “The pace is painfully slow … . Visibility
remains murky.”
The stock
market ended a turbulent year with a fizzle — all pain
and no gain. The S&P 500 index, a broad measure of
major companies, finished at almost exactly the same
spot as 2010, with a difference of only a few hundredths
of a percentage point. The Dow Jones industrial average
closed up 5.5 percent for the year. And the Nasdaq
composite index finished down 1.8 percent.
The big
financial news for 2011? “That the United States
private sector managed to get through without
disaster,” said Peter G. Morici, a University of
Maryland Smith School of Business professor and former
chief economist at the U.S. International Trade
Commission.
“I’m
serious,” Morici continued. “This economy is not
being well-managed. The economy is treading water, and
so is the market.”
Since the
recession, U.S. companies moved quickly to stabilize
their businesses through job- and cost-cutting moves,
and the overall economy has chalked up sluggish growth.
Investors were forced to keep a wary eye on the public
sector in 2011, at home and abroad, as central banks and
political leaders grappled with heavy government debt
and unpopular austerity measures in the United States
and Europe.
Expect
more of the same trepidation in 2012, analysts say.
Investors
and economists are worried that Europe will lurch into
recession in the first half of 2012, due to its debt
crisis, and are watching for signs of how the U.S. would
fare if that happens. Overall, though, U.S. company
stocks remain strong when compared to those of other
developed countries.
Standard
& Poor’s, which manages the S&P 500 index and
tracks worldwide markets, found that the U.S. was the
third-best global stock market in 2011 in terms of
financial returns, behind Indonesia and the Philippines.
For now,
part of the problem for investors and Wall Street,
analysts said, is that the slow U.S. economic growth
rate is leaving them tentative. The nation’s economy
grew at a rate under 2 percent in 2011, and some
economists are predicting slightly more than 2 percent
growth in 2012. Before the recession hit, the gross
domestic product was growing at around 3 percent.
“We’re
having a hard time wrapping our head around the notion
of what slow growth looks like,” Gayle said.
(EDITORS:
BEGIN OPTIONAL TRIM)
In early
2011, investors gladly saw their equities and 401(k)
holdings gain in value, and the bulls returned to the
market. Indeed, in early February, the Dow closed above
12,000 for the first time since mid-2008, even as
investors kept an eye on uprisings in the Middle East
and Northern Africa.
The
fallout from the revolutions in Egypt and Libya
continues, but it hasn’t contributed to the U.S.
market’s volatility in several months, experts said.
The first
real test for the U.S. stock market came in March, when
a devastating one-two punch of an earthquake and a
tsunami struck eastern Japan, killing more than 15,000
people and disrupting the economy of the nation’s
fourth-largest trading partner.
The Dow
lost 500 points in the course of a week, but soon
recovered. Some analysts said investors seeking
stability returned to the U.S. stock market after the
volatility in Japan and the Middle East.
It also
helped that Congress and the White House averted a
government shutdown in early April with a deal to cut
$38 billion from domestic spending programs for the rest
of the year.
Showdowns
between the Republican-controlled House and the Obama
administration will likely continue through 2012 — a
presidential election year — and will grab
investors’ attention, analysts said.
The Dow
Jones industrial average hit its 2011 peak on April 29,
in the days before Federal Reserve Chairman Ben Bernanke
held the first event of its kind: a public Q&A with
reporters.
The stock
market responded positively, but investors were cautious
as the U.S. economy’s gross domestic product was still
only growing at under 2 percent. (Investors aren’t
sure what more Bernanke and the Fed can do to stimulate
the economy in 2012, as interest rates remain low.)
Recession
fears came and went throughout the year — and such
anxieties remain in the background at the beginning of
2012. Last spring, for instance, economists worried that
the country could be slipping back into recession. The
high unemployment rate and weak performances from the
service and manufacturing sector were eroding investor
confidence.
But
starting in late June and lasting through the first
three weeks of July, the market enjoyed another high
ride.
Then, in
early August, the Dow lost around 2,000 points —
wiping out trillions of dollars in U.S. market value. It
was a harrowing time for investors and portfolio
managers.
It was
also the start of several months of jagged swings, as
investors were buffeted by economic woes in Europe and
tough news at home. Investors wanted out of the market
as talk of another 2008 market crash made the rounds
from Asia and Europe to the United States.
Significant
news events can be seen in the spikes in the market, in
the charts of all three major indices.
Lawrence
Raifman, a forensic clinical psychologist and instructor
at Johns Hopkins University who is teaching a course
this winter on “The Psychology of Financial Crisis,”
said that financial markets can operate like fads, with
investors adopting a herd mentality that over-emphasizes
the present moment and displaces long-term thinking.
“From a
psychological point of view, we seem to get caught up in
the here and now, the present,” Raifman said. “But
markets are supposed to be an indicator of future
returns and activities.”
In a
historic move in early August, Standard and Poor’s,
one of the major credit rating agencies, downgraded the
U.S. government’s debt rating to AA+ from the highest
AAA grade, as the nation faced mounting debt and
congressional gridlock.
That
sovereign credit downgrade was disruptive enough that
President Barack Obama took to the airwaves to try to
persuade the world that the U.S. is “and always will
be a AAA country.” Despite his assurances, the markets
tumbled.
Yet,
investors continued to flock to the security of U.S.
Treasury bonds, despite the credit downgrade, and
investors saw the potential long-term impact on the
stock market as muted, according to analysts.
By the
end of the year, the stock market seemed to regain its
footing and climb out of the ruts it fell into in August
and September.
“The
bright spot (in 2011) was really how companies did,”
said Charles Shriver, a vice president and portfolio
manager at T. Rowe Price Group Inc., a Baltimore-based
investment firm. “The corporate profit environment has
been resilient, despite weak economic growth.”
(END
OPTIONAL TRIM)
Brian
Greenberg, head of tax and financial planning firm Brian
C. Greenberg and Associates in Marlton, N.J., said the
stock market seemed more easily driven by news in 2011
— and he didn’t see that as a positive sign.
“The
buy-and-hold people killed the active traders because
there were so many gyrations that were all
news-driven,” Greenberg said. “A lot of people lost
a lot of money in the stock market because they were on
the wrong side. There were no discernible trends.”
He said
investors are eyeing a “horrendous” economic
recovery and have been forced to pay greater attention
to the federal government’s actions because of its
active role in managing the economy since the recession
and financial crisis.
With a
presidential election looming, Greenberg expects
investors to continue to view the market at least partly
through U.S. politics and potential leadership changes
in November.
“By its
actions, the government has become a market-maker,”
said Greenberg, who added that he thinks the
government’s actions are only slowing the economic
recovery. “It’s now in the forefront of fixing the
economy, and that’s what investors are feeding off
of.”
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