Snapshot 2012 – Markets & Economy

The Markets

• Equities: Though equities certainly experienced some volatility during the year, the stomach-churning declines of 2011 gave way to 2012’s more moderate fluctuations and dramatically improved performance. Optimism about the prospects for an economic recovery powered equities to year-to-date highs in the fall that lost ground in the fourth quarter as the path to a detour around the fiscal cliff seemed rockier. Helped (and eventually hampered) by some key tech bellwethers, the Nasdaq’s Q1 gain of almost 19% helped it set the pace for the domestic indices for much of the year and generally remain above its 2007 high. The Russell also powered back from 2011’s loss, while the Dow–the strongest of the five indices in 2011–took a back seat last year. It was even outperformed by the Global Dow, which benefitted in the year’s second half as Europe managed to avoid disaster. And the S&P 500’s 13.4% gain for the year was a definite improvement over the 0.0% of the year before.
• Bonds: Rock-bottom Treasury yields somehow managed to drop even further as the 10-year bond briefly hit a record low of roughly 1.43% in July. Treasuries, corporates, munis, junk, internationals–bonds benefitted across the board from investor demand and the Fed’s stepped-up quantitative easing efforts. Investors who continued to pull money out of stock funds put much of it into bonds, reassured that higher interest rates were at least a couple of years away from affecting bond prices.
• Oil: After starting 2012 at roughly $103 a barrel and remaining above $100 through the first four months, oil prices reversed the previous year’s upward trajectory. Despite a slight bump in August/September, mounting concerns about a slowing global economy took oil to $85 a barrel before a year-end rally nudged it back up to end the year at roughly $93 a barrel.
• Currencies: After a spring surge pushed the U.S. dollar to the year’s high against a basket of six currencies in June, the greenback lost 7.5% over the next three months before rebounding to end 2012 only slightly lower than where it started. Despite a couple of dips, the euro strengthened against the dollar, gaining roughly 2% over the year to end at roughly $1.32.
• Gold/silver: After plummeting almost 14% between late February and mid-May, gold spent the summer bouncing along on either side of $1,600 an ounce. By mid-July, a rebound had sent the price to the year’s high of just under $1,800 before fading to end 2012 at $1,676. And after spiking more than 60% to a high of $48 an ounce in April, silver prices settled down, ranging between $26 and $37 for the rest of 2012 and ending at $30.

The Economy

• Unemployment: The unemployment rate continued to meander downward, ending the year at 7.7%. Though the pace of improvement was frustratingly slow–the jobless rate didn’t fall below 8% until September–the employment picture was still better than December 2011’s 8.5%. However, the Fed has forecast only minimal improvement in that figure during 2013, and has promised to keep interest rates low until unemployment hits 6.5%.
• GDP: Despite a little spring slump, by the third quarter the U.S. economy was growing at an annualized 3.1%–more than double Q2’s 1.3% and the fastest growth of 2012–and Q3 corporate after-tax profits were 3.2% ahead of the same time a year earlier. However, there were signs that growth had begun to taper off in the fourth quarter as anxiety about elections and the fiscal cliff mounted.
• Inflation: Modest improvements in the economy had little impact on prices at either the consumer or wholesale level. By November, annual consumer inflation was only 1.8%–well within the level the Fed considers acceptable and lower than 2011’s 3%. The 1.5% increase in wholesale costs was slightly better, and was far more moderate than 2011’s 4.7% wholesale price jump. Consumer spending and retail sales both showed gains for the year, though holiday shopping was reportedly slower than anticipated.
• Housing: While not completely healed, the housing market showed signs that a sustainable recovery was under way. By year’s end, sales of new homes had hit their highest level since April 2012 and were 15.3% higher than a year ago, while home resales had their ninth straight month of gains. Home prices were up an average of 4.3% from a year earlier, while housing starts, construction spending, and building permits all had strung together several consecutive months of improvement.