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Markets end year barely changed, despite turbulence

By Drew DeSilver, The Seattle Times –

SEATTLE — In a year when stocks swung wildly from day to day based on perceived macroeconomic risk, it was Europe’s long-running debt crisis, not the fragile U.S. economy, that worried traders most.

Every time European leaders cobbled together a plan to rescue struggling countries — Spain, Portugal and, above all, Greece — stocks rallied. And every time those plans proved unable to restore confidence in the euro, stocks plunged.

The EU is so big, and the world so knit together by trade and investment, that few countries would be unaffected by a European meltdown, analysts say.

“If we see an unraveling in Europe, it’s going to be hard for the U.S., Japan, even China and India, to transcend that,” said Robert McConnaughey, head of equity for Columbia Management in Boston.

Euro worries battled for traders’ hearts and minds with surprisingly robust U.S. corporate profits. But investors noted that much of those profits derived from ruthless cost-cutting during the recession, rather than any significant or lasting upturn in demand.

“There’s not a lot of confidence out there,” said Matthew Kaufler, co-manager of the $1 billion Federated Clover Value Fund. “They’re all waiting for signs that the worst is behind us.”

Given those crosscurrents, it’s no wonder that U.S. stock markets closed out 2011 more or less where they started it.

The broad Standard & Poor’s 500 index closed Friday at 1,257.60, down all of four one-hundredths of a point for the entire year. The Nasdaq composite index ended Friday at 2,605.15, down 1.8 percent for the year.

The interesting thing, said D.A. Davidson’s chief investment strategist Fred Dickson, is that even those blah results were enough to make the United States one of the world’s 10 best-performing stock markets.

“This was not a beauty-queen year,” Dickson said.

The outlier among the major market gauges was the Dow Jones industrial average, which gained 5.5 percent over the course of the year to close at 12,217.56. Kaufler said the Dow’s outperformance reflected a deeper trend toward stable, blue-chip companies — especially among investors chased out of the bond market by record low yields.

“Forget about calling a sector or an industry in this environment,” he said. “Look for companies with lots of free cash flow and a commitment to either repurchasing shares or paying out a significant dividend — that’s the way you’re going to survive this period.”

That said, the best-performing sectors in 2011 were classic defensive plays: utilities, consumer staples and health care, particularly biotech and health-care technology.

Financial-services stocks had tough sledding in 2011. Financials, in fact, were the year’s worst-performing major sector, down 16.6 percent.

According to Renaissance Capital, 125 companies went public in the United States in 2011, down from 154 in 2010. But that was enough to make the United States the world’s most active IPO market for the first time since 2008.

Most analysts expect 2012 to be a lot like 2011, with much the same constellation of factors pushing and pulling on stocks: Europe’s debt crisis, a slow and delicate U.S. recovery, and partisan sniping and stalemate at least until November’s election.

Dickson expects the tepid pace of recovery to continue next year. “We’re going 17, 18 miles per hour in a 55-mile-an-hour speed zone,” he said. That will make matching this year’s profit-growth numbers challenging for even the healthiest companies.

Columbia Management’s McConnaughey agreed, saying that previously implemented cuts and efficiencies will take firms only so far absent higher top-line sales: “One cannot grow forever by cutting costs.”

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