U.S. Stocks Erase Yearly Gain as S&P 500 Moves Least Since 1947

December 31, 2011, 12:23 AM EST By Ksenia Galouchko and Lu Wang

Dec. 30 (Bloomberg) -- U.S. stocks fell this week, leaving the Standard & Poor’s 500 Index virtually unchanged for the year, as concern Europe’s debt crisis will weigh on the economy halted a two-year rally in equities.

The benchmark gauge for U.S. equities lost 0.04 point to 1,257.60 in 2011, the smallest annual change since 1947. Financial shares slid 1.3 percent in the week and 18 percent this year, the worst drop among 10 industries, as Bank of America Corp. tumbled 58 percent. Commodity producers fell 12 percent as a group. First Solar Inc. had the biggest drop in the S&P 500, losing 74 percent, followed by coal producer Alpha Natural Resources Inc. with a 66 percent loss.

Gauges of health-care companies, utilities and makers of household products and other consumer staples climbed more than 10 percent this year as investors bought companies whose profits are least-tied to economic growth. Cabot Oil & Gas Corp. in Houston rose 101 percent in 2011 for the gauge’s biggest rally, followed by pipeline owner El Paso Corp. and Sunnyvale, California-based medical device maker Intuitive Surgical Inc.

“It’s the year I’d like to forget because of all the tumult in the markets,” Brian Jacobsen, who helps oversee $209 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, said in a telephone interview. “The U.S. data has been looking better but it’s not just the matter of the U.S. data but what’s the outlook, and investors are still concerned about whether or not economic recovery is losing steam.”

European Concerns

The S&P 500 fell 0.6 percent this week as Spain’s widening budget deficit and a surge in the European Central Bank’s balance sheet stoked concern over the region’s debt crisis, offsetting better-than-expected U.S. consumer confidence and home sales data. The Dow Jones Industrial Average declined 76.44 points, or 0.6 percent, to 12,217.56, paring its 2011 gain to 5.5 percent.

The S&P 500 finished the year recording record price swings and correlations. The benchmark index started the year with a rally, rising as much as 8.4 percent to a three-year high by the end of April and extending its rebound from a March 2009 bear- market low to 102 percent.

The index tumbled throughout the summer as Congress and President Barack Obama struggled over U.S. deficit cuts, leading S&P to strip the nation of its AAA rating in August, and concern grew that the euro-area’s debt crisis was threatening the global economic recovery. The S&P 500 fell as much as 19 percent from April to its low for the year on Oct. 3.

Rising Correlations

Developments in Europe’s efforts to tame its debt crisis led to near-lockstep movement in equity prices. The 50-day correlation of S&P 500 stocks to gains or losses in the full index increased to a record 0.86 in October, according to data compiled by Westport, Connecticut-based Birinyi Associates Inc. A level of 1 would mean all 500 stocks moved together. Correlation was 0.78 on Dec. 30, 73 percent higher than its average since 1980.

The Dow alternated between gains and losses of more than 400 points on four days for the first time ever in August. Daily share swings in the S&P 500 averaged 2.2 percent that month, the most for any August since 1932, Bloomberg data show. The index moved an average of 1.9 percent a day from May through the end of the year, compared with the 50-year average of 0.6 percent before the collapse of Lehman Brothers Holdings Inc. in 2008.

Fund Withdrawals

Investors have been pulling money from mutual funds that focus on U.S. stocks for a fifth year. Outflows totaled $116 billion in the first 11 months of this year, the highest since 2008, according to data compiled by Bloomberg from the Investment Company Institute, a Washington-based trade group.

U.S. companies have beaten analyst profit estimates for 11 straight quarters as the country climbed out of the worst recession since the Great Depression. Earnings from S&P 500 companies are forecast to reach a record $98.79 a share this year, and climb 9.7 percent in 2012 and 12 percent in 2013, according to analysts’ estimates compiled by Bloomberg.

As stock prices failed to keep up pace with earnings, valuations reached levels cheaper than 72 percent of the time since 1954, according to data compiled by Bloomberg. The S&P 500 ended the year trading at 13.2 times reported earnings, 20 percent below the average multiple of 16.4, the data show.

‘Murky Outlook’

“If you look at balance sheets and cash flow statements, stocks are attractively valued, but they’re not incredibly cheap considering the murky outlook that we have from the political arena,” Jacobsen at Wells Fargo said. “People are clamoring for safer assets, the classic defensive sectors.”

The Morgan Stanley Consumer Index, which tracks drugmakers and food companies, added 0.7 percent this year, compared with a 16 percent loss in the firm’s cyclical measure of commodity producers and transportation providers.

The S&P 500 Dividend Aristocrats index, which follows companies that have raised payout for at least 25 consecutive years, returned 8.3 percent. The S&P 500 ended the year with a dividend yield of 2.1 percent, compared with a rate of 1.88 percent for 10-year Treasuries, and the index returned 2.1 percent in 2011 including reinvested dividends.

Bank of America plunged 58 percent to $5.56 in 2011, making it the worst performer in the Dow, as concern about mounting mortgage losses and a global economic slowdown weighed on the second-biggest U.S. lender. The decline erased almost $80 billion of shareholder value, and was the firm’s largest drop since a 66 percent plunge in 2008, when a U.S. bailout staved off a collapse.

Alcoa, First Solar

Alcoa Inc., largest U.S. aluminum producer, slumped 44 percent to $8.65 this year for the second-worst drop in the Dow as prices of the lightweight metal tumbled 18 percent.

First Solar tumbled 74 percent to $33.76. The biggest manufacturer of thin-film solar cells slashed its sales and profit forecasts for 2011 after ousting Rob Gillette as chief executive.

Alpha Natural declined 66 percent to $20.43 after acquiring Massey Energy Co. for $7.1 billion and announcing earnings that missed analysts’ estimates for the first two quarters of 2011.

Cabot Oil surged 101 percent to $75.90 this year. The company, which has fields in Pennsylvania, Texas and Oklahoma, projected output will rise as much as 55 percent next year. El Paso, based in Houston, rallied 93 percent to $26.57 in 2011 after agreeing to be bought by Kinder Morgan Inc. for $21 billion.

Intuitive Surgical jumped 80 percent to $463.01. The maker of a robotic system to perform surgery reported earnings that beat analyst estimates for the 10th straight quarter, according to data compiled by Bloomberg.

Netflix Inc. dropped 61 percent to $69.29. The video- streaming and DVD subscription service reduced its subscriber forecast and predicted losses in 2012.

--With assistance from Inyoung Hwang and Katia Porzecanski in New York. Editors: Michael P. Regan, Jeff Sutherland

To contact the reporters on this story: Ksenia Galouchko in New York at kgalouchko1@bloomberg.net; Lu Wang in New York at lwang8@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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