Expect more wild swings in stock market in 2012

By Karl Henkel | January 2, 2012 at 12:05a.m.

YOUNGSTOWN

The year 2011 was, by all accounts, a disappointment for the stock market.

Analysts predicted big gains, and they got them.

But markets were also gashed with historic losses that offset those promising gains and left the overall stock spectrum relatively unchanged.

Now, heading into 2012, an election year, questions still remain, and 2012 looks no clearer than 2011, which Robert Gardner described as “frustrating.”

“I’d describe 2011 as a rather frustrating year of fits and starts,” said Gardner, CPA and financial adviser with Stifel, Nicolaus & Co. Inc., Butler Wick Division in Canfield.

“We began the year well enough, but from May on, we dealt mostly with the European credit crisis plus domestic political issues such as debt ceilings, credit downgrades and tax policy debate.”

The Dow Jones Industrial Average posted three of its best 12 days of all time, gaining 423 or more points twice in August and once in November.

But it also posted three of its worst 12 days of all time, losing 512 or more points in a one-week span during August.

Gross domestic product rose 1.8 percent during the third quarter, a downward revision from the previous 2.0 percent estimation and still less than the 2.6-percent growth exhibited during 2010’s third quarter.

“There is a recovery going on, and it is improving, but it’s extremely small, very slow,” said Cleveland-based economist George Zeller. “It’s so slow, it’s almost impossible to measure.”

The reason for the slow growth, Zeller said, is the unsolved housing crisis and lack of regulation on investment banks.

“The biggest threat to the recovery is the irresponsibility of the investment banks,” he said.

Through it all, however, the economy still grew.

“The U.S. economy can be surprisingly resilient even in the face of serious challenges,” Gardner said.

But those same challenges in 2011 will remain, he said, most notably the European debt crisis. Throw in one of the most-contentious presidential races in years, and stocks may be as turbulent as they were in 2011.

“While the stock market historically has persevered in both single-party systems and divided Congresses, not having well-defined policy for the long-term clearly has businesses on the defensive and less willing to commit capital, expand or hire,” Gardner said. “We know many U.S. corporations have ample cash and stronger balance sheets, yet hiring remains stubbornly weak.

“I think it’s likely that this being an election year, with the potential for a change in economic and tax policy, on top of the concerns out of Europe, all are contributing to a market unable to find a direction.”

But there may be some positive news.

According to Stock Trader’s Almanac, election years are strong years for markets.

Some evidence, though, isn’t conclusive.

Forbes charted the Dow during the past 23 election years dating back to 1920. In 15 of those years, or 67 percent, the Dow finished with positive results.

Comparatively speaking, however, nonelection years fared just about the same, up 68 percent of the time.

“Fear is still widespread in our markets, with Europe now the main culprit, and many investors simply choose to hold the safest, lowest risk-reward type of investments, such as U.S. Treasuries and even cash,” said Gardner, who added that investor runs on bonds could lead to another “bubble” burst. “It will be interesting to see how long that lasts,” he added.