Major U.S. stock indices ended the final session of the year lower to close the week out much as the year turned out – dividing the four-session holiday-shortened week into two up and two down.  The year looked very much like this as the first half of the year posted a gain, with the second half erasing that bounce.

Hence, for the year the broad market, as measured by the S&P 500, ended essentially flat on strictly a price appreciation basis and up roughly 2.12% when including dividends.  That’s not bad in the sense that with all that’s going on the risk that accompanies stock-market investing is certainly elevated, but from a historical perspective for the third year of a presidential term the result was pathetic.  I bring this up because I listened to all the mainstream analysts that stated, with apparent assurance, the market was going to record outsized gains in 2011.  As you all know, I was a bit skeptical, not only because this time is much different than normal, but also after the hard bounce that had already occurred from the nefarious low hit in early 2009.  In the postwar era (WWII), the average total return for the third year of a presidential term is nearly 20%.

The best-performing sectors of the year were utilities (up 14.8%), consumer staples (up 11.15%) and health care (up 10.5%) – that’s just price appreciation; when including dividends the three groups were up 19.9%, 13.9% and 12.7%, respectively.  The worst were financials (down 18.4%, and -17.0% when including dividends), basic materials (down 11.6% and -9.7% with dividends) and industrials (down 2.9% and -0.59% with dividends ).

The Treasury market was the clear winner in 2011 as the longer-end of the yield curve delivered a 12%-plus return.  While the chances of getting burned in these long-dated Treasurys is hugely heightened in this very low rate environment, the Fed’s not about to take their foot off the monetary pedal; nor are the challenges that drive traders to this trade going away anytime soon.  I feel longer-term rates will go lower still before they eventually erupt – impossible to know though with central bankers so manipulating the market; it’s much better to error on the side of safety and stay short duration.

And then there were commodity prices as crude began 2011 at about $90/bbl and ended at $99 (topped out at $114 and bottomed at $75); gold raged to $1900 after beginning the year at $1420, then slid back to end at $1566/oz; and industrial metals (copper/aluminum) held at elevated levels during the first-half of the year, before sliding by 25% in the back-half as global growth began to weaken.

And on the European scene, the euro held up remarkably well for the year, really holding above 1.30 UER/USD for all but a few days of the year (recall in 2010 the currency cracked, falling to 1.18).  This is surprising considering the market began to push bond yields within the most-troubled euro-zone economies considerably higher than the benchmark German bunds (Greek 10-year to 35.0%, Portuguese 10-year to 13.4%, Italian 10-year to 7.10%, Spanish 10-year to 5.10%).  But of course, as is the case in every corner of nearly every market these days, there was massive government intervention.  Actions in the U.S., Switzerland and Japan helped to keep their currencies from rising against the euro further than would have been the case.

Market Activity for December 30, 2011

Sector Activity for December 30, 2011

Milwaukee NAPM

Beer production continued to roll in December, at least according to the latest NAPM (National Association of Purchasing Managers – a factory gauge) out of Milwaukee.  The measure rose a point to a reading of 57.8 (shy of expectations, but this is a good level so no need to quibble over such things).

So this report ends a string of decent-to-strong regional reports for the month – results out of the New York, Philly, Chicago and Milwaukee were solid-to-strong, Richmond was kind of weak (but positive) and Dallas being the only region to post contraction for December.

Again, we’ll see how things go for manufacturing in 2012 as that tax benefit (higher depreciation allowance) expires.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900