- - Thursday, December 29, 2011

ANALYSIS/OPINION:

After the volatility the stock market has experienced this year, which clearly intensified in the second half, it comes as little surprise that it should end the last week of 2011 just that way — volatile.

On the heels of better-than-expected holiday sales and a quieter-for-now Europe, the S&P 500 tipped ever so slightly into the black early this week. By the end of Wednesday, all the gains in the S&P 500 were more than erased and once again the index was back in the red on a year-to-date basis, albeit modestly. Yet as I write this, the index has turned positive on a year-to-date basis. Whether the S&P 500 will finish the year slightly in the red or slightly in the black we will see after Friday’s market close.

For individual investors, more than most are happy if not relieved to close the book on the 2011 stock market. Volatility aside, and the lack of any real return in the past 12 months, the 10-year return for the S&P 500 is tracking close to 7 percent. But one of the pitfalls of spreadsheets, in my opinion, is the ability to gin up good or bad performance simply by altering the chosen time period.

For example, if we looked at the five-year performance, the S&P 500 would have dropped more than 11 percent, but if we looked at the three- or nine-year performance, it would have increased by more than 38 percent in either period. One can find both good and bad periods of performance depending on the time period being scrutinized.

While that may or may not put the 2011 stock market into perspective, all things being equal, it was not a good year but it was not a bad year either. However, it is 2012 that many are looking at now and wondering whether more of the same is in store for the next 12 months.

We started 2011 with expectations of an improving domestic economy, which were dashed as we exited the first quarter, and had to contend with rising debt and deficit levels. That fear will continue because Congress has accomplished little on that front, and President Obama will ask Friday for $1.2 trillion in additional borrowing authority as agreed to under the government-shutdown deal.

This will avoid the need for further debt-ceiling increases before the 2012 elections, but would increase the debt limit to $16.4 trillion. After all, the wrangling by individuals to get a better handle on their finances since the start of the financial crisis just a few years ago, many are asking, “How is it the federal government can continue to borrow more?” The sad but simple answer is that it spends far more than it raises in revenue and that for every dollar it spends, it borrows 36 cents. In the fiscal year that ended Sept. 30, the government spent $3.6 trillion and collected $2.3 trillion.

Needless to say, rising debt and deficits remain an issue.

In terms of the domestic economy, we continue to get signs that it is on the mend, but I suspect that initial expectations for 2012 will be revised after the holidays as we take into account and factor in all of the negative pre-announcements we have heard from companies in the past few weeks of the year from Oracle Corp., Cavium Inc., E.I. du. Pont de Nemours & Co., Corning Inc., Walgreen Co., CarMax Inc. and Actuant Corp., to name but a few. All that plus issues in Europe and slower growth in China as well.

While I remain optimistic for 2012, my concern is that we are beginning the year on the same rocky road we have been on for the past several months.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. Follow him on Twitter @ChrisJVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.