What Did We Learn in 2011?

A Year of Stormy Seas

Every year has its ups and downs, but 2011 had more than most, creating unusual volatility in the financial markets. We could describe it as a bit like being tossed on the ocean in a stormy sea, swooping up one moment, and plunging down the next. This volatility left many investors gasping for breath, at least figuratively, and maybe even feeling a little seasick!

The S&P 500 is only one of several indexes, but we’ll use it to illustrate these market ups and downs. For example, in a two-week period from July 25 through August 8, the S&P 500 lost almost 17% of its value. On November 30, it gained 4.3% in a single day.1 Yet by the end of the year, the S&P 500 was just 0.04 points lower than where it started—the smallest annual change in history!2
 
Global Events

The pro-democracy movement in the Middle East began in late 2010 with events in Tunisia and spread to Egypt and Libya in early 2011. Economically, the Libyan conflict was particularly significant because of the country’s key role as an oil producer. On February 22, after fighting broke out in Tripoli, the S&P 500 dropped 2.1%. This was its largest single-day decline since the previous summer. Crude oil prices rose 8.6% to reach $93.57 per barrel, the highest level in more than two years.3  Oil prices continued to rise through the end of April, when they began a six-month decline. The earthquake and tsunami that hit Japan in March devastated the Japanese economy and caused humanitarian and economic concern around the globe. The S&P 500 dropped for three consecutive days the following week, but it quickly recovered and went on to reach its high for the year on April 29.4 The real impact of the Japanese disaster for the United States played out over a longer period of time because of the decline in the flow of Japanese products.

Debt Concerns

The steep decline of the S&P 500 in late July and early August, mentioned at the beginning of this article, coincided with acrimonious debate over the federal deficit and raising the debt ceiling. The decline continued for a week after a last-minute agreement was reached, fueled by dissatisfaction over both the outcome and the unprecedented downgrading of the U.S. credit rating by Standard & Poor’s Ratings Services.5

The United States was not alone in struggling with debt in 2011. The European debt crisis cast a shadow over the global economy and contributed to many more ups and downs for the markets. After Greece announced it would be unable to meet its financial obligations, the S&P 500 hit its low for the year on October 3rd.6 Less than a month later, on October 27, news that European leaders had forged an agreement to address the Greek issue helped spark a 3.4% increase that contributed to the largest one-month rally of the S&P 500 since 1991.7

Obviously, world events can have a dramatic effect on financial markets. However, these effects typically dissipate fairly quickly. Long-term trends are rarely, if ever, driven by a single event.

Rather than focusing on market volatility, it may be more helpful to look at the long-term growth of the U.S. economy. In the third quarter of 2011, real gross domestic product grew at an annual rate of 1.8%. Although less than the 2010 growth rate, this was a substantial improvement, suggesting that the economy has continued to recover, albeit slowly, from the Great Recession of 2008–09.8

Persistent unemployment affects millions of Americans and has been one of the most significant drags on the economy and financial markets, so perhaps the best economic news of 2011 was that the unemployment rate dropped to 8.5% in December, the lowest rate since February 2009. If this trend continues, it may bode well for 2012.8

It will take some time to fully understand the economic impact of the stormy financial seas caused by domestic and global events of 2011.

So what can we take away from all this? Is it time to get out of the water and tie your boat to the dock?

Absolutely not!

I hope you saw from the examples here that domestic and global events are random and unpredictable. Many investors did see some losses in their portfolios last year, but consider this: If you got out of the market because the S&P 500 took a 17% dive, you missed the subsequent upturn. Would you, or anyone, be able to accurately predict the optimum time for getting back in?

Volatile times call for a disciplined, steady plan of action, a time to make sure you are truly diversified, and not (as is the case for far too many American investors) simply holding a lot of “stuff.” The only way to know this is to take a good look inside the funds in your portfolio.

Times of feeling a bit “seasick” are NOT times for an emotional response. The wisest course is to follow a sound, disciplined investment strategy based on your long-term goals, personal situation, and risk tolerance.  To schedule a look "under the hood" of your investments, or to talk further about this, call Jeremy Burri or me at 920-893-5262.

Margaret Wittkopp
Financial Advisor/Coach
Investment Advisor Representative

1)Yahoo! Finance, 2012, for the period 12/31/2010 to 12/31/2011. The S&P 500 Composite Index is generally considered to be representative of U.S. stocks.
2) CNNMoney, January 3, 2012
4) The Washington Post, July 13, 2011
5) Standard & Poor’s, August 5, 2011
6) CNNMoney, October 3, 2011
7) CNNMoney, October 27, 2011; October 31, 2011
8) U.S. Bureau of Economic Analysis, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material partly prepared by Emerald Connect, Inc.


The painting, A Ship in Stormy Seas, is by Mantague Dawson.  To purchase it, click here.