Published December 29, 2011
The year now ending could well be characterized as one in which a whole lot happened -- but not a lot got done.
One need look no further than U.S. stock market for proof of this assertion. Despite 12 months of wild gyrations, the S&P 500, one of the broadest and most widely-watched indexes used to gauge the health of publicly traded U.S. companies, is essentially unchanged for the year.
Stocks rose early in 2011 on optimism for a strengthening economic recovery in the U.S., only to plunge in the second half as that recovery stalled. Frustrations with political dysfunction in the U.S. and fear of an economic meltdown in Europe contributed to the downturn. In the end, markets finished the year almost precisely where they began.
U.S. labor markets also hardly budged: economists are predicting the December unemployment rate will likely hold steady at around 8.6%, down from the 9% rate at the start of 2011.
It’s been that kind of year.
For investors, 2011 began much as it ended, with eyes focused warily on events overseas.
In late January protesters began amassing in Tahrir Square in Cairo, Egypt, demanding the resignation of long-time President Hosni Mubarek, who stepped down on Feb. 11. Tahrir Square became the epicenter of sorts for pro-democracy uprisings across the Middle East, soon dubbed the “Arab Spring,” which saw authoritarian governments overturned in Tunisia, Egypt and Libya.
The upheavals briefly pushed the price of oil higher on fears that worldwide distribution would be impacted, but those fears were mostly unfounded. In Egypt, Mubarek was quickly replaced by military leaders and democratic reform remains a long way off. The same is true in Libya, where Muammar Gaddafi’s four decades of oppressive rule ended with his violent death in October.
The entire world’s focus turned to Japan on March 11 when an offshore earthquake caused a tsunami that crashed ashore Japan’s northeastern coast, killing an estimated 20,000 people and causing hundreds of billions of dollars in damages to homes and businesses. A nuclear plant took a direct hit from the 20-foot high wall of water, raising fears of an environmental disaster on a scale of the 1986 Chernobyl meltdown in the Soviet Union.
The widespread devastation severely disrupted manufacturing distribution channels, notably for Japan’s powerful automotive sector, an impediment that put an additional strain on an already-stumbling U.S. recovery. For months, the U.S. Federal Reserve cited the Japanese natural disaster as one of a handful of temporary causes for rising global commodity prices.
The dysfunction in Congress that would come to epitomize 2011 in Washington, D.C., picked up steam in April, when a battle over a spending bill threatened to shut down the federal government. Republicans had taken control of the House of Representatives during the 2010 mid-term elections and, emboldened by the popularity of the tea party movement, fought for steep spending cuts. Democrats opposed cuts to education and popular entitlement programs such as Medicare and Social Security. Following a weeks-long standoff, a last-minute compromise kept government offices open.
The April squabble served as a template for three more Congressional standoffs over fiscal policy related to taxing and spending.
The second began shortly after the first ended. The summer of 2011 was consumed by the debate over raising the U.S. debt ceiling, normally a formality. Many Republicans opposed in principle the idea of borrowing more money to pay off the already-staggering U.S. debt load. The Obama administration said the U.S. would lose standing around the world if the debt ceiling wasn’t raised and the U.S. was forced to default on some of its debts.
Another last minute compromise staved off defaults, but the damage inflicted by months of political bickering was already done. On Aug. 6, a few days after the debt ceiling compromise was reached, ratings firm Standard & Poor’s downgraded the U.S. credit rating. The unprecedented move rocked financial markets for weeks.
Standard & Poor’s specifically cited the dysfunction in Washington for its historic decision to cut the U.S. rating to a notch below the coveted triple-A status. S&P asserted in a statement announcing the downgrade that “the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges …”
One of the big stock stories of the year came courtesy of Netflix (NFLX), the mail order and online movie company whose stock was the biggest gainer of 2010. That was not the case in 2011. In July the company raised its prices by 60%. Then, amid cries of outrage from its customers, the company in September inexplicably decided to split its business into two units: mail order and online. Droves of once loyal members fled, Wall Street analysts grew skeptical, lambasting CEO Reed Hastings, and Netflix’ stock plunged. From a high of $304 in July, just before the pricing debacle, the stock has fallen 77% to $69.
On Sept. 17 hundreds of people, mostly college-aged or in their 20s, gathered near Wall Street in Lower Manhattan to protest what they decried as corporate greed and an uneven playing field. After setting up an encampment in Zuccotti Park, a block from Wall Street, the group dubbed itself Occupy Wall Street and a movement was born. Over the next two months, similar groups established themselves around the country and the movement seemed to be gaining momentum in a fashion similar to the tea party a few years earlier. On Nov. 15, New York police swept the group from its de facto headquarters in Zuccotti Park, leaving its future as a mass movement in doubt.
Apple (AAPL) co-founder Steve Jobs died on Oct. 5 at the age of 56 after a long battle with pancreatic cancer. Comparisons to Thomas Edison were just one element of a wave of tributes to the man who, according to the lore that surrounded him, almost single-handedly changed the way people use computers, talk on telephones, listen to music and watch movies. He was indisputably a visionary and one of the most effective salesmen and CEOs in the history of corporate America. Steve Jobs was Apple and Apple was Steve Jobs.
The long-running European debt crisis, which had been roiling global markets for the better part of two years, came to a head in late October. With Greece on the verge of default, European fiscal leaders put together a rescue package contingent on approval of austerity measures by Greece. Within days the focus had shifted to Italy, a much larger economy than Greece, and then Spain. Concerns then arose that the contagion could spread to Austria and France, and the future of the 12-year-old, single currency eurozone appeared in doubt.
German Chancellor Angela Merkel, a voice of authority as leader of the healthiest economy in Europe, has pushed for austerity in lieu of more government bailouts, one larger than the next. Her position seemed to be gaining traction as 2011 came to a close, but the crisis is far from over.
As part of the last-minute compromise to settle the debt limit battle in August, Congress created a so-called Super Committee to cut $1.2 trillion from the deficit over the next decade. The 12-member group comprised of Republicans and Democrats from the House and the Senate had until Thanksgiving to agree on a plan. A loud and acrimonious standoff ensued, the third such quarrel over U.S. tax and spending policy this year. To almost no one’s surprise, by its Thanksgiving deadline the committee was forced to acknowledge its abject failure.
The year in Washington ended with a fourth Congressional standoff, this time over a payroll tax extension. As with each of the previous three, this one ended with a last-minute compromise – a two-month extension of the tax holiday in this case -- but not before a string of dueling press conferences, replete with finger pointing and casting of blame.
Much like unsettled Europe and the U.S. stock and labor markets, still volatile and weak, respectively, Congress ended 2011 much as it began.