Year in review: Debt crises held stocks in check in 2011

A tumultuous year for stocks. As 2012 begins, many investors are more concerned with return of capital than return on capital. That is understandable. Wall Street faced some powerful headwinds last year. With little policy momentum to foster or aid any available economic momentum, United States and global indices were poised to finish 2011 with flat to poor annual returns.
The debt crisis in Greece boiled over to Italy and touched Spain and France, scaring the world economy. Key heads of state from the European Union reaffirmed their countries’ commitments to the euro and sought to reassure investors.
Many observers saw as much rhetoric as action in their efforts and were skeptical that the EU could effectively address its debt crises in the coming years.
At home, our economy expanded, but not as much as would be hoped for in the typical recession recovery. Unimpressive job creation and high unemployment thwarted any housing rebound, despite record-low mortgage interest rates. Many consumers perceived the economy as bad and Congress as even worse, but consumer spending and retail purchases showed improvement in an economy where inflation hovered around 3.5 percent and growth hovered around 2 percent.
A super committee of 12 Capitol Hill legislators could not agree on where to make cuts to the federal deficit, only months after a drawn-out fight to raise the debt ceiling prompted Standard and Poors to issue a historic downgrade of the U.S. credit rating to AA+.
Stocks. As this paper went to print, the Dow was up 5.1 percent for 2011. The S&P 500 was basically flat, down .73 percent.  The NASDAQ had lost 2.54 percent.  Looking at the small caps, the Russell 2000 was down 6.72 percent.
How about the S&P 500 sectors? The financials were the biggest drag on the S&P at down -12.8 percent.
Other global benchmarks suffered from the anxiety generated by years of fiscal mismanagement on the part of sovereign governments. Morningstar data (measured in U.S. dollar terms) showed the following YTD losses among important world indices on Nov. 22: Sensex, -20.2 percent; CAC 40, -24.6 percent; DAX, -23.5 percent; FTSE 100, -11.8 percent; Hang Seng, -21.0 percent; Nikkei 225, -18.7 percent; Australian All Ordinaries, -13.3 percent; TSX Composite, -12.3 percent; Shanghai Composite, -14.1 percent; MSCI Emerging Market Index, -21.0 percent; MSCI Word Index (ex-USA), -15.5 percent.
Commodities. Gold and silver had definite allure. Looking at the handy charts from IndexMundi.com, gold was up 22.8 percent YTD and silver 12.3 percent YTD on Nov. 22; copper, on the other hand, was at -22.4 percent. In energy, crude oil had advanced 7.8 percent on the year; natural gas had fallen 20.7 percent; RBOB Gasoline futures were up 20.5 percent YTD. In crop futures, wheat was at -11.5 percent, cocoa -15.3 percent, oranges +40.6 percent, barley +7.0 percent, coffee -5.5 percent, sugar -11.6 percent, cotton -38.2 percent, rubber -26.4 percent and soybeans -12.7. The U.S. Dollar Index approached Thanksgiving down 0.8 percent on the year.
Real estate. The annualized numbers mean most in this sector, and these were the latest available by late November. The pace of existing home sales as measured by the National Association of Realtors was 13.5 percent better in October 2011 than in October 2010, although the month-to-month data had shown basically a plateau since February. NAR’s pending home sales index (September edition) showed 6.4 percent annual improvement; the National Association of Home Builders/Wells Fargo Opportunity index showed housing affordability at its highest in more than 20 years. The 20-city S&P/Case-Shiller Home Price Index showed an overall 3.8 percent year-over-year decline in prices in the September edition.
Total housing permits hit their highest level in seasonally adjusted terms in October since spring 2010 (when the home buyer tax credit expired). New home sales, however, were down 0.9 percent from a year before in October.
All in all, it was a year for patience. 2011 required it, and 2012 may require much more. Years of deficit spending have come to haunt key economies. What would have been stunning volatility during most of the 1990s or 2000s seems par for the course today as we have to hang on, stay diversified and ride out the turbulence – hoping that our stock market can manage at least a bit of “decoupling” from the debt troubles plaguing continental Europe.
Brad Ledwith is a certified financial planner and runs his own wealth management firm in Morgan Hill. He is a registered representative with and offers securities through LPL Financial, member FINRA/SIPC. CA Lic. OC69547. If you have financial questions you would like to have answered in this column in the future, email br**@le**************.com.