U.S Stocks Fall to Trim Yearly Gain

By Inyoung Hwang and Katia Porzecanski - Dec 31, 2011 4:36 AM GMT+0700

U.S. stocks fell, leaving the Standard & Poor’s 500 Index (MXEF) virtually unchanged in 2011 after one of the most volatile years in the market’s history, as concern about Europe’s debt crisis halted a two-year rally in equities. The euro weakened and Treasuries gained.

The S&P 500 fell 0.4 percent today to close at 1,257.60 at 4 p.m. in New York, compared with its 2010 closing level of 1,257.64 and marking the smallest annual change since 1947. The Dow Jones Industrial Average lost 69.48 points, or 0.6 percent, to 12,217.56 to trim its yearly gain to 5.5 percent. The euro slipped 0.1 percent to $1.2944 and slid below 100 yen for the first time in a decade. Ten-year Treasury yields lost two basis points to 1.88 percent. The S&P GSCI Index (SHCOMP) of raw materials retreated 0.1 percent.

Indexes of stocks and commodities had the worst yearly returns since the U.S. financial crisis in 2008, while Treasuries capped their biggest gains since then. The euro had its first back-to-back annual losses versus the dollar in a decade. Spain said today it will cut spending and raise taxes to slash a budget deficit that will exceed its target, highlighting the risks to growth from measures meant to tame Europe’s debt crisis.

“Spain’s numbers show that it’s very difficult to have strong economic performance while you’re trying to deleverage,” Kevin Shacknofsky, who helps manage about $5 billion for Alpine Mutual Funds in New York, said in a telephone interview. “The U.S. economic data has been experiencing some bounce in the last quarter. The negative is still Europe.”

Global equity markets lost $6.3 trillion in value this year as the debt crisis and slowing global economic expansion weighed on demand for riskier assets.

Volatile Year

The S&P 500 started the year with a rally, rising as much as 8.4 percent to a three-year high by the end of April and extending its rebound from a March 2009 bear-market low to 102 percent. The index tumbled throughout the summer as Congress and President Barack Obama struggled over U.S. deficit cuts, and sank further amid concern that Europe’s debt crisis was threatening the global economic recovery. The S&P 500 fell as much as 19 percent from April to its low for the year on Oct. 3.

Data signaling that the world’s largest economy was weathering Europe’s crisis helped the market rebound. The U.S. unemployment rate fell to 8.6 percent in November, the lowest since March 2009, after lingering at 9 percent or above for seven straight months.

The Citigroup Economic Surprise Index (CESIUSD) for the U.S., which measures the rate at which data is beating or missing economists’ estimates, reached a record 97.5 in March before slumping to a two-year low of minus 117.2 in June. The index has since rebounded and rose as high as 85.7 this month.

Top 10 Returns

The S&P 500 had fluctuated above and below its 2010 closing level since the end of October. The S&P 500 and Dow were still both among the 10 best yearly returns among 91 national equity indexes tracked by Bloomberg. Benchmark indexes advanced in only one of 24 developed markets this year, with the 0.6 percent advance in Ireland’s ISEQ Overall Index the only gauge topping the S&P 500.

The Dow alternated between gains and losses of more than 400 points on four days for the first time ever in August. Daily share swings in the S&P 500 averaged 2.2 percent that month, the most for any August since 1932, Bloomberg data show. The index moved an average 1.9 percent a day from May through the end of the year, more than triple the 50-year average of 0.6 percent before the collapse of Lehman Brothers Holdings Inc. in 2008.

Yearly Losses

The Stoxx Europe 600 Index rose 0.9 percent today to trim its 2011 loss to 11 percent. The MSCI Asia-Pacific Index slid 17 percent this year and the MSCI All-Country World Index fell 9.4 percent. Each gauge dropped on a yearly basis for the first time since 2008.

The European benchmark index’s retreat in 2011 was led by a 32 percent drop in banks, the worst performance among 19 industry groups. Financials also were the worst performers in the S&P 500 this year, down 18 percent as a group, with Bank of America Corp. losing 59 percent to lead declines.

“I think the key to 2012 is what happens with the financials,” Mark Bronzo, who helps manage $23.5 billion at Security Global Investors in Irvington, New York, said in a phone interview. “They’ve been underperforming for so long, does this group finally start to participate in the market, or does it continue to underperform? That’s going to go a long way to determining what kind of year we have because it’s a big sector.”

Treasury Rally

Two-year Treasury yields fell three basis point today to 0.24 percent and 30-year yields decreased one basis point to 2.90 percent. Treasuries rose this year as investors sought the relative safety of U.S. government bonds on concern the euro- region debt crisis will worsen.

U.S. debt has returned 9.6 percent in 2011, according to Bank of America Merrill Lynch data, even after S&P cut the nation’s AAA rating on Aug. 5. German bunds also gained 9.6 percent, Japanese bonds advanced 2.1 percent and U.S. corporate debt rallied 7.3 percent. Treasuries beat stocks, commodities and the dollar for the year, even as reports indicate the U.S. economy is recovering.

Italian 10-year bond yields added eight basis points to 7.11 percent today, holding above the 7 percent level that foreshadowed bailouts of Greece, Ireland and Portugal. The debt had its worst year since at least 1992. French 10-year rates climbed six basis points to 3.15 percent, after the nation said it will sell bonds maturing between 2021 and 2041 on Jan. 5.

‘Dire’ Sentiment

“The risks in Europe will get worse before it gets better,” said Matt Brady, an executive director for foreign exchange at JPMorgan Chase & Co. in Sydney. “Risk sentiment is going to be dire as we head into 2012.”

U.K. ten-year gilt yields rose one basis point to 1.98 percent after earlier touching a record low of 1.932 percent. Gilts returned 17 percent on average in 2011, including reinvested interest, the most among 26 government markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.

The S&P GSCI Total Return Index (SPGSCITR)of commodities slipped 0.1 percent today and fell 1.2 percent for the year. Cocoa in New York plunged 31 percent in 2011 on signs of expanding supplies from Ivory Coast, the biggest producer. Cotton lost 37 percent this year amid increasing output and dwindling demand. Copper, often seen as an indicator of economic activity as it is used in construction and automobiles, had its first loss since 2008.

Gold Rebounds

Gold futures rose 1.7 percent to $1,566.80 an ounce today, the first gain in seven days. While bullion gained 10 percent this year, an 11th straight yearly advance, prices have plunged as much as 21 percent since touching a record $1,923.70 on Sept. 6.

Copper climbed 2 percent to $3.436 a pound. Oil today pared a third annual increase, slipping 0.8 percent to settle at $98.83 a barrel, after a second straight month of contraction in Chinese manufacturing spurred concern that demand may slow in the second-largest crude-consuming country.

About two shares advanced for every one that fell in the MSCI Asia Pacific index, which rose 0.5 percent. Japan’s Nikkei 225 Stock Average added 0.7 percent and Hong Kong’s Hang Seng Index gained 0.2 percent.

The Shanghai Composite Index climbed 1.2 percent, its biggest gain in two weeks. The gauge tumbled 22 percent this year, the most since 2008, and extended last year’s 14 percent drop, on concern increases in borrowing costs and Europe’s debt crisis will derail economic growth in the world’s second-largest economy. The index’s 33 percent drop since 2009 makes it the worst performer among the world’s 15 biggest markets.

The MSCI Emerging Markets Index rose 0.1 percent, leaving it down 20 percent for the year.

To contact the reporters on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net; Katia Porzecanski in New York at kporzecansk1@bloomberg.net

To contact the editor responsible for this story: Michael P. Regan at mregan12@bloomberg.net