Quarterly Recap - 2011 Fourth Quarter

Global equity markets ended multi-year winning streaks as 2011 index measures for stocks and commodities registered their worst annual performances since the U.S. financial crisis of 2008. Frenzied trading halted a two-year U.S. rally as Europe's still unresolved sovereign debt crisis prompted fears over higher borrowing costs that diminished confidence and earnings outlooks. For all the market's bravado and extreme volatility this year, the S&P 500 Index ended with a near-zero point loss of just 0.04 (4/100th) of a point, the closest flat line performance since 1947 when it closed exactly unchanged. Thanks to reinvested dividends, the index returned its dividend payout yield of 2.1%. The Dow Jones Industrial Average rose 5.5% on the year (+8.4% including dividends), while the NASDAQ Composite fell 1.8% in 2011 (-0.8% total return).

The 2011 market rollercoaster ride began with an 8.4% S&P 500 advance to a three-year high at the end of April, only to erode during the summer months as Washington leaders grappled over needed federal budget deficit cuts and the debt ceiling. From its 1,370 May 2nd peak, partially driven by Standard & Poor's cut on the U.S. AAA credit rating on August 5th, the broad market index plunged 19% to its 1,074 October 4th year low. Oversold valuations and generally slow, but overall improving U.S. economic conditions had helped return the index to unchanged levels for the year. In fact, during the fourth quarter the Dow Industrials saw its biggest quarterly point gain in three years, while the S&P 500 returned 12.8% during the same three-month period. Unfortunately, for the year, global equity market capitalization fell 12.1% or nearly $6.3 trillion to $45.7 trillion.

Domestically, large-cap stocks outperformed smaller capitalized companies as the Russell 2000 Index, a proxy of small-cap equity performance, fell 4.2% on the year. The Dow and S&P 500 indices were among the ten best performing indices among the world's 91 national stock indices. Yet among the 24 developed nations' market indices, just the Dow and Ireland posted better returns than the S&P 500. Outside the U.S., China's inflation battle and manufacturing slowdown contributed to the 11.7% negative performance on the MSCI EAFE Index (Europe, Australia, and Far East regions). Japan's massive March 11th earthquake and tsunami along with Thailand's July-through-December record flooding exacerbated the effects of China's slowdown, sending the MSCI Emerging Markets Index plunging 18.2% this year. This year's 22% decline on the Shanghai Composite Index coupled with its 14% decline last year gives China the dubious "worst two-year performer" title among the world's 15 largest markets.

Contrary to conventional investment theory that greater risks normally yield greater rewards, the Utilities sectors delivered the highest sector gain among the ten major S&P industry groups, up 19.9% in 2011. The other two defensive-oriented sectors – Consumer Staples (+14%) and Healthcare (+12.7%) – were the other top performers. Of the three losing sectors, Financials was the worst performing sector, down 17.1% on the year. Commodity producers lost 12% as a group, led by a 37% cratering in cotton and a 32% plunge in natural gas. Gold rose 10% during the year, while crude oil saw a third year of gains, up 8.5%.

Safer-haven fixed-income markets again proved to be the best performing broad investment category. U.S. Treasuries ended their best year since 2008 with slight gains, sending the benchmark 10-year note yield to 1.877%, its first year closing below 2% since 1977. The 10-year began the year with at 3.30% yield. For the year, Treasury bonds of all maturities returned 9.6%, easily beating corporate high-yield debt. Non-investment grade corporate bonds returned 4.9% last year, according to the Barclays US Corporate High-Yield Index. Courtesy of flight-to-safety buying, the overall investment-grade bond market had a total return of 7.8% last year, as measured by the Barclays US Aggregate Bond Index.

Municipal Bonds extended positive performance into a fourth straight quarter and posted the highest total return of any primary asset class during the year. As measured by the Barclays Municipal Bond Index, this tax-favored asset class returned 2.1% in the fourth quarter and 10.7% in 2011, the best since 2009. Municipal bonds however, ended the year with the lowest yields in 44 years (since 1967) as state and local governments cut spending, leading to a diminished supply of bonds.

1. Morningstar Direct (all performance percentages are total return based, which include reinvested dividend, interest)

The views expressed here are those of the Research Department, Cetera Financial Group, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. The market indices discussed are unmanaged. Investors cannot directly invest in unmanaged indices. Please consult your financial advisor for more information.

Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. Please consult your financial advisor for more information.

Small cap stocks may be subject to a higher degree of market risk than large cap stocks, or more established companies' securities. Furthermore, the illiquidity of the small cap market may adversely affect the value of an investment, so that shares, when redeemed, may be worth more or less than their original cost.