Stocks had good year in 2012 despite the headlines

By Steve Rothwell

The Associated Press

NEW YORK -- If you'd told investors what was going to happen in 2012 -- U.S. economic growth at stall speed, an intensifying European debt crisis, a slowdown in China, fiscal deadlock in Washington, decelerating corporate earnings growth -- and asked how the stock market would perform, few would have predicted a good year.

But that's just what they got.

The Dow Jones industrial average, the Standard & Poor's 500 and the Nasdaq composite index all ended the year substantially higher, despite losing ground in the final week of year as concerns about the looming "fiscal cliff" mounted.

The Dow gained 7 percent for the year, its fourth consecutive annual advance, having started the year at 12,217. The S&P 500, which started the year at 1,257, is up 13 percent, beating the 7.8 percent average annual gain of the past 20 years. The Nasdaq also logged a better-than-average gain, 16 percent.

Including dividends, the total return on the S&P 500 index was even better: 16 percent.

Financial companies led the gains among S&P 500 stocks, advancing 26 percent, as banks continued their restructuring efforts after the recession. Bank of America more than doubled, gaining $6.05 to $11.61 and Citigroup advanced $13.25, or 50 percent, to $39.56. Utilities, the best-performing industry group last year, was the only sector of 10 industry groups in the index to decline, dropping 2.9 percent.

"There's been a lot thrown at this market, and it's proven to be very resilient," said Gary Flam, a portfolio manager at Bel Air Investment Advisors in California. "Here we are at the end of the year, and it's still relatively strong."

Stocks started the year on a tear, with optimism about an improving job market and a broader economic recovery providing the backdrop to the S&P 500's best first-quarter rally in 14 years.

The index advanced 12 percent by the end of March, closing the quarter at 1,408, its highest in almost four years. At the start of the second quarter, the intensifying European debt crisis and concerns about the impact that it would have on global economic growth prompted a sell-off.

By the start of June, U.S. stocks had given up the year's gains. The outlook for growth in China, the world's second-largest economy, also began to weigh on investors' minds. The Dow fell as low as 12,101 June 4. The S&P dropped to 1,278 June 1.

The market only recovered its poise after the European Union put together loans to bail out Spain's banks on June 10 and the head of the European Central Bank, Mario Draghi, pledged to do "whatever it takes" to save the euro.

By the time Fed Chairman Ben Bernanke announced Sept. 13 that the U.S. central bank would start a third round of its bond-purchase program, which is intended to push longer term interest rates lower and encourage borrowing and investment, the S&P 500 had surged 14 percent from its June 1 low. A day later, the index peaked at five-year high of 1,466. The Dow Jones reached its peak for the year of 13,610, Oct. 5.

The year's final twist came in Washington.

Stocks wavered ahead of a presidential election that at times seemed too close to call, and while President Barack Obama ultimately reclaimed the White House by a comfortable margin, the Republicans retained control of the House.

The divided government set the stage for a tense end to the year as Democrats and Republicans sought to thrash out a budget plan that would avoid the U.S. falling off the "fiscal cliff."

Any agreement will still be "ill-tasting medicine" to the economy, as it will almost certainly involve both spending cuts and tax hikes, says Joe Costigan, director of equity research at Bryn Mawr Trust Company.

"The question is, how much will the drag from the government be offset by business and personal spending," says Costigan. "The market has reasonable expectations for growth priced in, so I don't think we're going to see a big run-up."

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