Tue December 20, 2011
Investors Endure Another Disappointing Year
For Americans saving for retirement, 2011 was another lackluster year, filled with lots of risks but few rewards.
Savers who tried to avoid risks by putting money into federally insured savings accounts earned almost no interest. The money just sat there, even as inflation ate away at its value, with consumer prices rising nearly 3.5 percent this year.
And for those who invested in a broad array of U.S. stocks, the results were — at best — mixed.
On Tuesday, stock prices were rising on good news about housing starts. But this bounce is not enough to make 2011 a winning year. Most stock investors have lost money, and probably a lot of sleep, since January. They had to sweat out frightful plunges time again and again.
"It was a year of jitters, with huge swings in sentiment," said J.P. Morgan Asset Management Chief Market Strategist Rebecca Patterson.
The Shadow Over Markets
The poor performance and volatility of financial markets generally reflected uncertainty and disappointment tied to the failure of governments to fix debt problems. In the United States, Congress nearly triggered a Treasury default this summer by delaying legislation to raise the nation's debt ceiling, and in Europe, a number of debt-laden governments teetered on the edge of default.
But while investing generally was a frightening, frustrating experience in 2011, some winners did emerge. Those included people who invested in U.S. Treasury securities at the year's start.
Back in January, the conventional wisdom held that owning bonds, such as 10-year Treasuries, would be a lousy idea. At the time, those government notes were yielding about 3.4 percent.
Experts were predicting interest rates would rise throughout 2011. According to these forecasts, bonds would decline in value as investors spurned the measly 3.4 percent yield to chase after newer, higher-yielding bonds. In such a rising interest rate environment, "everyone thought bond prices would fall," said Paul Edelstein, director of Financial Economics for IHS Global Insight, a forecasting firm.
Bonds, Gold Did Well
But the opposite happened. Interest rates fell dramatically in 2011. Today, newly issued 10-year Treasuries are yielding only about 1.8 percent.
As a result, those old bonds have become much more valuable — making the people who were holding them very happy. The Dow Jones Credit Suisse Index of 10-Year Treasuries shows a gain of roughly 18 percent for the year through Monday.
Another happy group: "the gold bugs — they were right for the better part of the year," Edelstein said. People who bought an ounce of gold in January paid about $1,450. Today, that ounce is worth about $1,600, roughly a 10 percent gain.
For those who did buy stocks, the best picks involved large U.S. corporations. The Dow Jones industrial average, a measure of the stock prices of 30 blue chip U.S. companies, rose about 1.6 percent for the year through Monday's market close. (On Tuesday morning, stocks surged, with the Dow up more than 200 points.)
The big, brand-name companies in that grouping, such as McDonald's, Microsoft and General Electric, paid out dividends to investors this year. So even if stock prices didn't rise much in 2011, the cash paid out to stockholders made blue-chip investments somewhat attractive.
"The well-established companies did well," said Jamie Farmer, executive director of Dow Jones Indexes. "That reflected the flight to safety."
As part of that flight to safety, the U.S. stock market had a better year than many foreign markets. The Dow Jones Global Total Stock Market Index was down more than 13 percent for the year.
"This is still the safest, most liquid market in the world," Patterson said of U.S. financial markets.
What About Next Year?
Predictions for 2012 are difficult to make because of the extreme uncertainty in Europe, where the continuing debt crisis is threatening to trigger a financial meltdown that could spread around the world.
But absent such a catastrophic event, U.S. stock investments are likely to do well because corporate earnings are expected to rise, most analysts say.
"U.S. growth is poised to be stronger in 2012," Edelstein said. "And I would expect interest rates to stay low."
That combination should make for a relatively healthy investing environment. "But analysts are all over the map because no one is certain how the European debt crisis gets resolved," he said.