Stocks quickly went nowhere in 2011

Buy big-company U.S. stocks paying dividends. Tread carefully amid international stocks. Go easy on bonds, lest you be skewered when interest rates start rising. Expect the U.S. economy to keep shuffling ahead — fast enough to make stocks attractive but too slow to make a big dent in unemployment. That seems to be the most common view as the gurus of Wall Street stare ahead into 2012. If those forecasts seem familiar, they ought to. They sound very much like the forecasts for 2011 from a year ago. Some of them were wrong. Bonds last year outperformed the stock market, which took a scary summer dip but basically ended up where it started the year. For investors, living through 2011 was like walking through a Halloween haunted house. Scary things jumped out at us all along the way. First came the Japanese earthquake that stalled industrial production here and abroad. Then the Libyan civil war helped spike oil prices again. Summer rolled around, and it looked as if Congress just might default on $9 trillion in Treasury bonds. All the while, Greeks were drowning in debt and threatening to drag European banks down with them. By late summer, the sum of those scares made it seem that the U.S. might drop back into recession. It didn't, but stocks slumped anyway. Just as we were sighing with relief this fall, the Greek debt disease spread to Italy, jangling nerves in the banking system, and Europe seemed headed for a recession. All those combined to throw American investors off kilter. "Mr. and Mrs. Investor have given up on stocks," says Dave Rolfe, chief investment officer at Wedgewood Partners in Ladue. "Look at the fear around us. Every day we're looking for a neutron bomb to come out of Europe." The S&P 500 Index of big companies ended the year flat, down a mere 0.003 percent (1,257.64 at the end of 2010 versus 1,257.60 on Friday). On the other hand, the Dow Jones Industrial average rose 5.5 percent, pushed higher by a few blue chip stocks such as IBM and McDonald's. Bond investors did much better. The J.P. Morgan Aggregate U.S. Bond Index returned 8 percent as foreign money fled to U.S. Treasuries and interest rates slid. Stocks follow company profits more than anything else, but last year they didn't. Profits rose 12 percent at big companies while stocks were going nowhere. "Many risk-averse investors were looking for safety this past year, not attractive valuations," wrote Gary Thayer, chief macro strategist at Wells Fargo Advisors. Those who ventured abroad got stomped in 2011. Emerging markets investors lost 18.6 percent, as measured by the MSCI Total Return Emerging Markets index. International developed markets investors lost 12.1 percent, measured by the EAFE index. So, the worry is that 2012 will be like 2011 — another stuff-happens year, full of nasty surprises. Chris Varvares is in the optimistic camp. "We think the economy is not in bad shape," says Varvares, who is co-founder of Macroeconomic Advisors in Clayton, one of the nation's most respected forecasting firms. After pulling out of its summer slump, the U.S. economy is probably growing at a 3.5 to 4 percent annual clip this quarter. That will slow to 2.2 percent early next year but then pick up to a healthy 3.5 to 4 percent rate by 2013. America still has a lot going for it, he says. We're an inventive people with a growing population, and we're rapidly working through the problems that brought the Great Recession. Consumers are getting debt under control. As a percentage of income, consumer debt service is back to the level of the early 1990s, and default rates are back to normal. American banks have largely repaired their finances, and they're loosening credit a bit. That means more consumers will be in shape to shop, despite continued high unemployment. Recent data point to improvement. The consumer had a merry Christmas with holiday retail sales up by perhaps 3.8 percent, estimates the National Retail Federation. The consumer confidence index is ticking upward. Unemployment claims have shrunk to three-year lows, pointing to improvement in the job market. But the Federal Reserve is still forecasting 8.5 to 8.7 percent joblessness in 2012, no better than November's 8.6 percent. The construction industry is still out cold, but housing prices are probably "bouncing along the bottom" after four years of falling, says Varvares. Corporate profits remain on a roll. The consensus among analysts is for an 8 percent profit increase next year. That's a critical number for investors. Big-company stocks are selling at around 13 times earnings, compared with a historical average of 16. "You have to go back to the late 1980s to find a period where stocks have been this cheap," says Joe Williams, chief equity strategist at Commerce Bank. Bonds aren't providing much competition. Dividends on the S&P 500 stocks are higher than the yield on 10-year Treasury bonds: 2.12 percent versus 1.56 percent. As Varvares sees it, all that adds up to a 5 to 10 percent rise in stock prices this year. As the economy picks up steam, he thinks a 20 to 30 percent rise in stocks is possible in 2013. THREATS ABROAD What could foul up such a rosy forecast? Two places far away: Europe and China. Investors last year lost faith in the ability of southern European nations to pay their sovereign debts, and they have been yanking money out of European banks that hold that debt. Europe's arguing leaders offer plans and financial patches, but nothing so far has done the trick. The danger is that the orderly retreat will become a panic, prompting a 2008-style financial meltdown in Europe. Worry over that, combined with strict austerity policies, pushed the continent to the edge of recession this fall. Optimists are betting that saner heads will prevail — eventually. Varvares thinks the crisis will have to get worse before Europe's leaders will be forced into a big-fix solution. But fix it they will. Expect that sometime around midyear, he says. Until then, expect a rocky ride for American stocks over the next few months. Meanwhile, worries over China are tanking mining stocks and some commodity prices. The Beijing government is slowly deflating a real estate bubble, and worries are growing about a credit bubble. China is an export machine. If the world's woes were to slow that machine, the twin bubbles might burst with consequences around the globe. Fortunately, the government seems to be engineering a soft landing, with growth slowing to 8 percent from 10. Compared with Varvares, Mark Keller is a Gloomy Gus. The CEO of Confluence Investment Management in Webster Groves puts odds at 80 percent of a recession in the U.S. this year. As he sees it, the European mess will boil on all year. It's already pushed Europe into recession, he says, and the effect on our exports and our confidence should be enough to tip America into a mild slump. That's his upside scenario. Things could get much worse, he says. "A major financial system failure over there would back up into our banks and recreate the 2008 nightmare," says Keller, formerly a top stock prognosticator at A.G. Edwards. "It's a possibility. We're more likely to get a garden variety two-quarter recession here in the states. For the man on the street, it won't feel much worse than it is now." A down economy means a slumping stock market. Stocks could dip perhaps 20 percent in the first half of the year, he says. That would be the time to buy. "We're pretty bullish on the second half of this year," he says. Presidential elections are generally good for stocks. Investors will wake up Nov. 7 to a "cessation of uncertainty," says Keller. No matter who wins, investors will know what to expect. "We'll probably end up with positive returns for the year," he says. Read more: http://www.stltoday.com/business/local/stocks-quickly-went-nowhere-in/article_94c30cfe-da32-5183-960b-842fc8286e93.html#ixzz1iAgB3ddM