2011 was a year of extremes, though you wouldn’t know it by just looking at the data, since it looks like the stock market will end the year roughly where it started.
But that’s deceptive. Stocks have been on a roller coaster ride, regardless if the starting and ending points are similar. 2011 confounded even the smartest of investors. What made this year so frustrating was that financial theory—do X when Y happens—didn’t always hold up.
As the year ends, here’s a look back on what happened in the economy, why, and what we expect for the year ahead.
Stock Market: Roller Coaster
The stock market began plunging in July, only to end the year like a champ. And that roller coaster ride to get there may be less and less remarkable: Some experts think that volatile might be the new normal. For more on why that is and what that means, read this.
The Dollar: Shunned, Then Welcomed
Ever since 2008 when investors began to understand the full extent of the economic downturn, fewer and fewer people wanted to own American currency. This was because the government addressed our country’s weighty indebtedness by issuing more debt, which inherently devalues the dollar (if there are more dollars, each one is worth less).
People continued to shun the dollar in the first half of 2011, but real concerns about the financial health of European countries like Greece and Italy emerged in August. That made the U.S. situation look good by comparison, and the dollar has been on an absolute tear ever since.
Housing: Rebounding … Slowly
We recently explored a recent revelation that the real estate crash was even worse than everyone thought. But, continuing the theme of extremes, there are some signs (like an increase in the rate apartments are being built and the rise of some of the most affordable housing in history) that this low may lead to a rebound in real estate.
Gold: No Longer a “Safe Haven”?
Precious metals are generally considered “safe”: Even if the dollar experienced inflation, the thinking is that gold wouldn’t suffer so much because it’s a limited resource. In the first half of 2011, investors were nervous and seeking safety, so the price of gold and silver skyrocketed. But by September, the precious metals tumbled. Investors became worried that the issues in Europe could create another cash crunch, so they sold gold to gain more cash.
Jobs: It’s the (Rebounding?) Economy, Stupid
The job market seems bipolar. While we’re seeing fewer people without jobs, it’s still taking a really long time for the unemployed to find them. Though some of America’s biggest companies like Apple and ExxonMobil have seen record profits, they’re mostly not hiring, expanding or buying up other firms. Worried about the economic future, these firms are sitting on their hands and taking a wait-and-see approach.
What to Expect for 2012
Given that 2011 can be difficult to comprehend in retrospect, we can’t pretend to know exactly what will happen in 2012. But here are some things we do expect:
- More contradictions. If 2011 was a year of extremes, 2012 will be a year of contradiction, as parts of the economy continue to worsen while others improve. For example, the construction sector may build new housing, even while more people struggle to pay off underwater mortgages. Companies may enjoy record profits, but they’re reluctant to hire.
- Homebuyers. While there’s no way to really know which way the housing market is headed, one thing is certain: Houses are really affordable from a historical perspective. Expect more people to take advantage of low prices and cheap financing to buy a home.
- Increased volatility. During this unprecedented crisis, it feels like everyone is writing the rules as they go, from economists to politicians. We flip-flop between being surprised about how bad things are and relieved at a glimmer of hope. Especially given the speed of information in the technology age, the market has likely changed for good, with highs and lows happening more quickly and more drastically.
- Growing need to manage risk. Lately, the exceptions have become the rules. Today, investors who say, “Bank of America stock can’t possibly drop below $5” soon see that it can. Investing in the stock market has proven to be profitable over the long term, so set your expectations accordingly. We only recommend putting your money in the market if you have more than five years before you’ll need it back. To learn your risk personality, take this quiz.
The economy, stock market and housing are all showing signs of improvement, but there are mixed signals. Until we can confidently wave the “all clear” flag, the most important thing you can do is to get educated. To learn the ins and outs of investing, including where to put your money to keep it safest, take our Investing Courses.
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