The S&P 500 was a tough benchmark to beat ...
Given the barrage of bad news in the second half of 2011, it is impressive that the S&P 500 ended the year close to unchanged (up 2% counting dividends). Large-capitalization U.S. stocks, particularly defensive, dividend-paying stocks, proved to be the safe haven in global equity markets in 2011. As a result, the S&P 500 was a tough benchmark to beat. The majority of stock market investors underperformed the S&P 500, including approximately three-quarters of professional U.S. equity managers.
Most foreign stock indexes suffered declines of between 10% and 20%. The MSCI All-Country World Index (Ex. U.S.) lost 13.7%. In the U.S., the Russell 2000, an index of small-cap stocks, lost 4.2%.
Within the S&P 500, there was a large disparity in sector performance. The defensive sectors ? utilities, consumer staples, and healthcare ? all managed to post double-digit positive returns. The worst-performing sectors were financials (dragged down by the big banks), materials, and industrials.
ECB Cranks Up The Printing Press
Markets in the second half of 2011 were held hostage to the continuing crisis and fear of systemic failure in Europe. The European Central Bank (ECB) resisted pressure to adopt an explicit policy of monetizing government debt on a large scale, such as the quantitative easing operations executed by the U.S. Federal Reserve. But in recent weeks, the ECB has implemented an indirect form of quantitative easing, which could backstop the European financial system for a period of time.
Through its Long Term Refinancing Operation (LTRO) program, the ECB has committed to provide virtually unlimited funding to European banks at a very low rate of 1%, which is far below the cost of private market financing. At present, the program consists of two major, three-year bank refinancing operations. The first recapitalization occurred on December 21, and the second will take place on February 28, 2012.
The scale of the December 21 recapitalization was impressive. In one day, the ECB infused 489 billion euros (the equivalent of about $630 billion) into European banks. Approximately 193 billion euros (the equivalent of about $250 billion) constituted newly printed money, while the remainder replaced existing credit facilities.