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Natural disasters, debt debacles and global political upheaval sent the markets on one of the wildest rides in recent memory in 2011. However, besides a few frayed nerves, Wall Street is set to ring in the new year in much the same place it started this year.
Global Stock Markets
The Dow ended the year with a 5.5% advance -- its third-straight annual gain. Out of the 30 Dow components, 18 ended the year in positive territory.
There were three companies responsible for virtually all of the blue-chip average's positive performance on a point basis: IBM (IBM), the computing giant, soared 25.3%, fast-food chain McDonald's (MCD) surged 30.7% and oil behemoth Chevron (CVX) jumped 16.6%. Pfizer (PFE), Home Depot (HD) and Kraft Foods (KFT) were also on the list of top-performing issues, but as the Dow is weighted based on share price, they didn't contribute as many points as the other three.
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Meanwhile, the broader S&P 500 edged 0.03% lower on the year, narrowly snapping a two-year winning streak, while the Nasdaq slipped 1.8%. The Russell 2000, which covers a broader swath of smaller names than the other major market averages, posted the worst performance, dropping 5.5%.
At one end of the spectrum were utilities, health care stocks and consumer staples, all tacking on solid gains during 2011. In contrast, financials were pummeled, and basic materials stocks sustained heavy losses.
In total, seven out of ten of the S&P 500 sectors ended in the green.
European markets fared much worse, with stock markets in the 17-nation euro zone taking especially heavy beatings. The German DAX slid 14.7%, while France's CAC 40 dipped 17%. Those two countries represent the biggest economies in the euro zone. Great Britain, which is a member of the European Union but not its currency bloc, saw its FTSE 100 shed a relatively modest 5.6%. The broader Euro Stoxx 600 dropped 11.4% in its worst slide since the financial crisis in 2008.
Commodity and Bond Markets
U.S. bond prices rallied as demand soared for the global safe-haven asset. The yield on the benchmark 10-year note dropped 1.421 percentage points to 1.878%.
Energy markets were mixed on the year. U.S. crude oil jumped 8.2% and wholesale RBOB gasoline climbed 15.4%. However, natural gas plunged 32.2%.
In metals, gold rose 10.2%, notching its eleventh-straight annual gain.
Wall Street's Frenetic Year
The relatively subdued performance in American markets hides the stomach-churning volatility U.S. equities faced in 2011.
Stocks had their first big test in the spring. A powerful 8.2 magnitude earthquake ripped through Japan on March 11, spawning at least 50 aftershocks and a powerful tsunami. The disaster killed thousands, strangled Japan's economy, one of the biggest in the world, and incited the worst nuclear disaster since Chernobyl in 1986.
Between March 11 and March 16, the broad S&P 500 shed 3.6% -- it recovered entirely by March 21, foreshadowing its resilience to major shocks. Besides the tragic human toll, it has taken automobile companies months to rebuild their supply chains following the disaster.
By late July, the markets were trading within 2 percentage points of the highs of the year and solidly in the green on a year-to-date basis. However, the latter part of the summer proved to be the darkest part of the year for Wall Street as a seemingly lethal dose of political gridlock, economic woes and sovereign debt worries spooked market participants across the globe.
Politicians in Washington were stuck in a deadlock over how to raise the nation's debt ceiling and stave off what many analysts feared could be a catastrophic default of U.S. debt. As the clock ticked, traders grew more and more frustrated, fleeing out of risky asset classes. President Barack Obama finally signed a debt deal into law, averting a default, on August 2, but it was too late. The Dow Industrials fell for eight-straight sessions beginning on July 22 -- plunging 858 points before getting a modest reprieve on August 3.
The selling wasn't over yet: Ballooning concerns over the U.S. economy sent the blue-chip average plummeting 513 points, straight into correction territory the following day. Traders, on edge, took a breather that Friday, leaving the markets little changed.
Then, well after the market closed for the week on August 5, Standard & Poor's dropped a bombshell. The ratings company sliced America's pristine credit rating by one notch for the first time in history.
When electronic trading in stock-index futures markets began that Sunday, the selloff began. By the close of trading on Monday, the Dow had crumbled 635 points, or 5.6%, while the S&P 500 tumbled 79.9 points, or 6.7%.
The markets were deep in the red for the year and the anxiety was palpable. Indeed, the VIX, often referred to as Wall Street's fear gauge, which started the year at 17.61 surged to 48 by August 8.
The following day, the Federal Reserve announced it plans to hold interest rates at extraordinarily low levels until 2013. The central bank also said it was prepared to take additional action to prop up the economy.
The pledge boosted market participants' sentiment, sparking a rally that sent the Dow surging more than 400 points. The upbeat mood was short lived, however. The Wall Street Journal reported the next day French officials were preparing for a potential downgrade of the country's debt. The report never came to fruition, but it battered stocks, sending the blue chips spiraling more than 500 points.
The roller-coaster ride continued throughout August, with the blue chips shedding more than 6%, but bouncing back considerably from the lows of the month. After fluctuating more in September, the S&P 500 hit its closing low of 1099.23 on the first trading day of October.
Then the markets lifted off that month as traders cheered a round of upbeat third-quarter earnings from several corporate heavyweights, easing fears over anemic economic growth, coupled with apparent progress on the European debt crisis.
The Dow, S&P 500 and Nasdaq were all up more than 9% for the month. Indeed, the blue chips posted their best performance on a percent basis since 2002, and the broader S&P had its best month in twenty years.
The last two months of the year were strongly influenced by happenings in Europe. The debt crisis that started in Europe's periphery in countries like Greece, Portugal and Ireland made its way straight into the continent's core, threatening Italy, and with it, the 17-nation euro currency bloc.
The crisis on both sides of the Atlantic lingers into the new year. In Europe, Italy's borrowing costs remain near the painful 7% mark, meaning Europe's third-largest economy may struggle to borrow the billions of euros it needs to support itself in 2012.
On the American front, Congress has yet to enact a plan to rein in the deficit. The country still stands at risk of seeing its debt rating slashed by other ratings companies besides S&P, and many economists are projecting stubbornly anemic growth for the following year.