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U.S. stocks withstand a volatile year

When it comes to stocks, the U.S. is unexpectedly sitting on top of the world.

Stock markets from Berlin to Shanghai to Sao Paulo, Brazil, ended 2011 with double-digit losses caused by the European debt crisis and fears of slowing economic growth in China. That was a blow to investors who have been counseled in recent years to broaden their portfolios to supposedly faster-growing venues overseas.

Even in a year when America’s own credit rating was slashed, the nation’s biggest stock indexes somehow sidestepped the global rout. The Dow Jones industrial average rose 5.5% and the Standard & Poor’s 500 index broke even.

The rebound left seasoned investors pleasantly surprised.

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“It feels like it’s just been horrifically bad, like we’ve gone through another crisis and like the market must be off 30%,” said Jim Paulsen, chief investment strategist of Wells Capital Management in Minneapolis. “But it’s turned out to be a pretty good year.”

U.S. stocks benefited from strong corporate earnings and investors’ desire to huddle into the perceived safety of larger companies. The market also was boosted in the last month by data indicating that the domestic economy is holding up in the face of Europe’s troubles and may be gaining traction going into the new year.

When 2011 year-end statements arrive in the mail next month, many individual investors may be surprised to find that their portfolios held up better than they expected.

That’s what Paul McGhee has been telling his friends and family. An avid investor who works as a computer programmer at ESPN in Connecticut, he’s heard lots of griping from people about their supposed investment losses in 2011. But when he examines their accounts he finds they haven’t lost money.

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“People tell me their portfolios did terribly and I’ll pick it apart for them and I’ll find they did OK, up 2% or 3%,” McGhee said. “People are discouraged about investing and their investments when, in fact, this was an OK year in the equity markets.”

Investment performance depends largely on where people stashed their money.

Investors who plunked big portions of their portfolios in European, Asian or emerging market bets undoubtedly are hurting. European and other international stock markets were pummeled by fear that the continent’s sovereign-debt crisis could spill into their economies and weigh down global growth.

Even China and other emerging markets, into which investors barreled in recent years because of their scorching growth, were tinged. The Chinese stock market sank 22% this year, while the average emerging market stock mutual fund sank 20%, according to Morningstar Inc.

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In the U.S., small-capitalization stocks -- the most vulnerable to big market swings -- were clobbered. The Russell 2000 small-cap index dropped 5.5% and the technology-heavy Nasdaq composite index fell 1.8%.

Investment returns also varied sharply among sectors. Utility stocks, historically an investor refuge in turbulent markets, soared 15% while financial shares skidded 18%. Bank of America shares, the Dow’s worst performing stock, tanked nearly 60%.

Losses were tempered by the solid showing of U.S. large stocks, bonds and gold.

The average intermediate-term bond fund rose 5.7%, according to Morningstar, as moves by the Federal Reserve to spur economic growth pushed down long-term interest rates. Gold had a record march higher this year, finishing 2011 up 10%.

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Yields on Treasury bonds fell sharply as investors rushed into U.S. government debt amid the world’s financial uncertainty. U.S. bonds were viewed as far safer than most of their European counterparts as the continent struggled with its debt crisis.

Investors’ overall returns also were boosted by things such as dividend payouts and employer matches on 401(k) retirement plans. Counting dividends, the total return of the S&P; 500 was 2.1%.

“For all the dramatic headlines and the volatility and the crazy market moves, there will be a collective sigh of relief as [investors] see that at the end of the year they’re largely unharmed,” said Don Montanaro, chief executive of online broker TradeKing.

Many investors found it hard to stay in the market given the extreme volatility that caused prices to whipsaw back and forth late in the year. Consider this for volatility: The Dow rose or fell more than 100 points on 104 trading days this year.

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And investors fled. Through November, skittish investors yanked more than $100 billion out of stock funds in 2011.

As they were driving to a University of Michigan football game during the market sell-off in September, a friend told Rick Massuch that the fluctuations were wreaking havoc with his emotions.

“He said, ‘I can’t deal with this. I’ve got to get out,’ ” said Massuch, 53, a construction company owner from New Hudson, Mich.

Massuch and others who stayed in the market were rewarded as share prices rebounded in the final two weeks of December.

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“It was a lot better year in the stock market than the volatility would have indicated,” said Joe Magyer, senior analyst at the Motley Fool investment website.

Stock prices began the year by climbing steadily through April as enthusiasm built that the economy was turning up. But the market tanked over the summer when Standard & Poor’s downgraded the U.S. credit rating, unnerved by the internecine political gridlock in Washington.

The Dow fell almost 17% from its late-April peak to its early-October low. It has risen almost 15% since then.

Many investment pros are cautious as they look toward 2012.

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They think earnings will remain strong, with cumulative profits for S&P; 500 companies projected to rise 10.4% in 2012 after an expected 12.6% advance this year, according to FactSet Research Systems.

But investment pros are bracing for continued volatility as prices are likely to sway in tandem with day-to-day sentiment about the European crisis.

“It’s probably going to be an OK year -- but then when you throw in what’s going to happen in Europe, that’s the big ‘I don’t know,’ ” said Sam Stovall, chief investment strategist at Standard & Poor’s Corp.

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walter.hamilton@latimes.com

Times staff writer Nathaniel Popper in New York contributed to this report.


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