ECONOMIC growth remained sluggish and politics often intruded on the markets, yet stocks achieved solid returns last year all the same. It wasn’t the first time that investors scaled a wall of worry, but it might be the only instance when the main source of concern, at least in the fourth quarter, was thought to be a cliff.
Tim Kelly/Reuters
A computer factory in Kobe, Japan. A resurgence in China's economic growth this year could help the stocks of various kinds of companies, including commodity providers.
The Standard & Poor’s 500-stock index rose 13.4 percent for the year, even with a 1 percent decline in the fourth quarter. In those last months, doubts rose about whether Congress and President Obama could reach an agreement on taxes and spending in time to avoid the so-called fiscal cliff — and the recession that was thought to lie below.
The drama in Washington was one of several throughout the year that kept investors focused more on capitols than corporate boardrooms. European leaders were continually devising plans to rescue the euro and some of the economies that use it, and China underwent a change of leadership.
Although the fourth-quarter loss was worse soon after Election Day and stocks raced ahead at the start of the new year, investors’ concerns may yet prove well founded. The immediate concerns related to taxes were resolved only at the 11th hour — just past midnight, really — and much remains to be sorted out on spending. Investment advisers said that politics, at home and abroad, would continue to guide markets.
“The political environment and uncertainty revolving around policy decisions has been a really big factor,” said Jeremy DeGroot, chief investment officer of the fund provider Litman Gregory. “There are significant deficit issues that developed economies are facing, and the markets are hanging on every development.”
One bit of uncertainty was eliminated on Jan. 1, when Congress agreed to limit the scope of scheduled tax increases, although the deal still resulted in higher tax rates on payrolls, dividends and capital gains.
Worries also abated when European Union finance ministers agreed in the fourth quarter to place big banks under the supervision of the European Central Bank. That followed the bank’s announcement that it would support the bond markets of weaker economies, which are concentrated along the region’s southern periphery.
THE moves on both sides of the Atlantic helped stock funds achieve modest fourth-quarter gains. The average domestic fund in Morningstar’s database rose 0.9 percent. International funds fared better, up 4.8 percent, on average, with portfolios that focus on European stocks returning 7.4 percent and emerging-market funds rising 6.2 percent. Full-year returns exceeded 14 percent for all four categories.
Yields on short- and long-term debt remained low all year as the Federal Reserve and other central banks maintained the easy monetary policies in force since the 2008 crisis. While that could account for much of stocks’ strength during 2012, the influence on bond returns, at least on high-quality government issues, may be waning.
The average bond fund rose a healthy 8.4 percent on the year, but the fourth-quarter gain was a slim 1.3 percent, dragged lower by a 1.1 percent loss for portfolios of long-term government bonds. High-yield bond funds rose 3.1 percent for the quarter, on average, and funds that specialize in debt issued in emerging economies gained 3.9 percent.
Just how helpful low interest rates were for economic growth is hard to discern. American economic output has continued to expand at a sluggish pace. And Europe is widely seen to be in recession.
“The trend of deterioration in Europe is not slowing down,” said Virginie Maisonneuve, head of global and international equities at Schroder Investment Management. She noted, though, that some indicators suggested that conditions were stabilizing at very low levels along the continent’s troubled southern fringe.
Whatever the economic impact of low interest rates, they seem to be helping corporate America. Corporate debt issuance last year exceeded $1 trillion for the first time.
Increased indebtedness provides leverage that lifts profit margins, said Jeremy Grantham, chief investment strategist of the fund management company GMO. Margins have reached record levels as a proportion of economic output and are “weirdly high,” in his opinion, “unless we’re in one of those wonderful secular shifts that people talk about but almost never see.” He doesn’t glimpse any such new normal, however, and cites high margins as a reason to be cautious about most stocks.
Rising debt of another kind is a pressing concern for many investors. With the national debt above $16 trillion, the second part of the fiscal cliff debate, focusing on spending cuts, is expected to be played out over the next month or so in Washington.
