A New Year... Let's Hope It's Better

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For many investors, at the beginning of 2011, there was considerable optimism, but while those investors may have been upbeat, as the year progressed they tended to get beat up instead! It was a year that saw huge daily swings in the stock market averages leaving a range of investors, from the Main Street retail investor with his/her 401k to some of the most sophisticated professionals of Wall Street increasingly perplexed. While much of the year found economists and financial analysts trying to determine whether the U.S. economy would fall back into a double dip recession, the introduction of European sovereign debt concerns mid year was the catalyst for what came to be 300, 400, and even occasionally 500 point daily swings in the Dow Industrial Average.

As for the S&P 500, the end of September found that index down by 10% year to date and accelerating further to a negative 14% in the early days of October before literally turning that loss around by month end. As for the full year performance results of the S&P 500 it turned out, amazingly, to be virtually 0% for the year. Yet look at all the sleepless nights that many investors had to endure to get to that point! Let's look at this from another perspective, that of the "presidential cycle." The third year of a president's term, which this was, has traditionally been the best of the four with the S&P 500 gaining 16% on average since 1945 without reinvested dividends, according to S&P data. The year 2011 was flat.

So what's in store for investors in 2012? As we enter the year, the sovereign debt concerns in Europe are still upfront, a political stalemate remains in Washington, along with the troubled housing market, and an unemployment rate that continues to be much too high. On the political front, one does not have to be either a Republican or a Democrat to be completely frustrated by the inability of our elected officials to make meaningful decisions, evidenced by low approval ratings. Ultimately voter's wrath may be taken out on both parties' incumbents unless they find a way to break the political gridlock resulting in some sensible legislation which can truly help to stimulate the economy.

Admittedly, the bearish tone that persisted for much of 2011, as regards the economy falling back into recession, continues to recede. Recent economic statistics have been somewhat encouraging. More jobs have been created, though certainly far below what is needed, and there appear to be fewer firings or layoffs. Along with falling gasoline prices, consumer confidence shows signs of improvement, which in turn can lead to more spending and rising factory output. So while there appears to be some solid evidence signaling improvement in the economy, hopefully the trend going forward will continue, but will most likely be on an uneven path with little likelihood of the U.S. economy experiencing boom conditions.

What will carry over into this year is the European debt crisis and that will have the greatest affect on the stock markets movements. We should continue to see volatility affecting the global markets, but hopefully if we can see Europe go two steps forward and only one step back, improvement can be made. Investors have struggled with the agonizingly slow pace of progress in Europe. While it continues trying to inch closer to fiscal integration, there are still too many unanswered questions. It remains unclear whether their bond markets will give European politicians the requisite time to achieve that stronger fiscal union while a rough outline of a plan continues to evolve.

There could be several flashpoints on the European calendar that could affect global financial markets. One of the most significant dates could be the French elections in April. France’s economic vulnerability has been a central theme in the election campaign and there are many expectations that the country’s prized triple A credit rating may be in jeopardy of being lost. Of the three candidates, including President Sarkozy, he is the only one staunchly in support of the Euro currency. Should he lose in the election there could be further pressure on whether the Euro remains the unified currency of the economic zone going forward.

On that front there is also the question of whether Greece remains part of the Euro zone. There is frustration as regards reigning in their budget deficits to satisfy requirements by their Euro Zone partners in order to obtain additional financing to satisfy impending liquidity needs. Many observers would not be surprised to see Greece abandon the Euro as a currency and return to the drachma. Still further concerns remain in Europe as to Italy’s ability to maintain financing of its sovereign bond debt at levels of 7% for ten year durations, which is seen as unsustainable

Consequently, Europe will continue to have a plethora of issues at both the outset and well into the New Year. The good news though seems to be that the U.S. is much better positioned for growth in 2012 than other developed markets around the world. That would be most welcomed and certainly that could lead to a better 2012 and that could make for a Happy New Year!

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