Wall Street closed out the year with a surge in the final trading session, betting on a last-minute resolution of the so-called fiscal cliff.
The market may have jumped the gun, but investors' hopefulness fit the pattern of 2012: It was a year of solid stock price gains worldwide, as various predictions of Armageddon fell flat.
That has reinforced many market pros' conventional cautious optimism as the new year begins. Bears can still find plenty to be dour about, but the bulls have called it right in three of the last four years since the 2008 financial-system crash.
On Monday, the Dow Jones industrial average jumped 166 points, or 1.3%, to end the year at 13,104. Stocks rallied late in the session as rumors spread that Congress would approve a deal to limit the tax increases and spending cuts otherwise set to kick in Tuesday.
But after the closing bell, a deal to avert the fiscal cliff appeared uncertain — raising fears of a blistering market sell-off Wednesday.
Still, investors who had expected a sustained slump in stocks in 2012 found themselves left behind as most world markets posted double-digit percentage gains, underpinned by a resilient U.S. economy and by central banks' efforts to keep interest rates at rock bottom.
Wall Street optimism about 2013 remains rooted in expectations that the U.S. economy will continue to expand, albeit slowly, and with it corporate earnings.
"Absent a complete failure from Washington, growth should remain positive," said Russ Koesterich, global chief investment strategist at money management giant BlackRock Inc. in New York.
That bet paid off in 2012: The Standard & Poor's 500 index, a popular benchmark for many Americans' retirement accounts, rose 1.7% to 1,426 on Monday and was up 13.4% for the year.
That was the biggest advance since the index rose 23.4% in 2009. Stocks' gains last year also beat returns on most kinds of bonds and on low-yielding short-term cash accounts.
The S&P index now has rebounded 111% from its decade low in March 2009, restoring most of the wealth lost by investors in the Great Recession — if they held on.
In Europe, the Stoxx index of 600 big-name shares rose 14.4% for the year, also the biggest rally since 2009. Japan's main market index soared 22.9%. Most so-called emerging markets also were up sharply, including those in India, Mexico and Turkey.
The 30-stock Dow index was a relative laggard, rising 7.3% for the year. It was hurt by weakness in major energy stocks as crude oil prices fell and by a collapse of shares of troubled tech giant Hewlett-Packard Co.
Markets worldwide had rallied in the first few months of 2012, then dived in spring as doubts multiplied about the global economy.
Europe, gripped for a third year by its government-debt crisis, was the epicenter of those fears: Many investors expected the Eurozone to finally break up under its debt strains, consigning Greece, Spain, Portugal and perhaps other nations to economic death spirals.
But the doomsday predictions were thwarted by the European Central Bank. In late July, ECB President Mario Draghi shocked markets by declaring that the central bank would do whatever was necessary to preserve the Eurozone. "And believe me, it will be enough," Draghi said.
The ECB followed that pledge with a commitment to buy unlimited sums of Eurozone governments' bonds, if necessary, to pull down countries' borrowing costs — similar to the U.S. Federal Reserve's ongoing program of buying Treasury debt.
The ECB's move sparked a sharp rally in the euro that buoyed confidence in European stocks as well, despite deep recessions in the Continent's hardest-hit economies.
The U.S. economy, meanwhile, confounded expectations that it would slide back into recession. The economy grew at a 3.1% annualized rate in the third quarter after slowing to a 1.3% rate in the second quarter. Growth was supported in part by the housing market's continuing rebound.
"Housing got us into this mess. Now it's one of the sectors to get us out," said Sam Stovall, chief investment strategist at S&P Capital IQ in New York.
Housing-related stocks were some of the year's biggest winners, with builder PulteGroup Inc. up 188%, appliance maker Whirlpool Corp. rising 114% and paint producer Sherwin-Williams Co. up 72%.
Worldwide, investors' confidence also benefited as worries dissipated about a war between Israel and Iran. And late in the year, hopes rose that China's slowing economy would avoid a so-called hard landing — which could have put it in a recession — and instead would help drive global growth in the new year. The Shanghai stock market rocketed nearly 15% in December alone.
Emerging markets such as China could be a big lure for global investors in 2013, some experts said. Many governments in those markets have more leeway than developed economies to bolster growth with fiscal stimulus measures and with lower interest rates, said Jack Ablin, chief investment officer at BMO Private Bank in Chicago.
By contrast, Ablin worries that U.S. economic growth and corporate earnings growth will be much slower than many investors are anticipating in the new year.
Whatever the ultimate workout of the fiscal cliff, Ablin said, "We are going to see taxes go up incrementally and spending go down incrementally," weighing on the economy.
Market pessimists believe that stock markets since 2009 have been driven largely by cheap credit supplied by central banks, particularly the Federal Reserve. Critics say the Fed's latest decision to ramp up purchases of Treasury bonds, aimed at pumping more money into the economy, smacks of desperation.
Fed Chairman Ben S. Bernanke, however, has insisted that the Fed still has plenty of tools left to help the U.S. recovery gain speed. Wall Street, by and large, believes Bernanke.
"If they can print money," Stovall said, "are the central banks ever really out of bullets?"
business@latimes.com
