2011 was a volatile year for stocks, and by now you know the primary reasons why.
Sovereign debt spread like wildfire throughout euro-zone nations, creating global fear and forcing credit downgrades in Greece, Spain, Italy, Portugal, Austria, and France – among others.
The U.S. saw its perfect credit rating downgraded from AAA status for the first time ever back in August, and the country was taken to the brink of default due to the partisan divide in the U.S. Congress.
A tsunami in Japan and mass flooding in Thailand caused ripple effects in markets all over the world.
Rioting and revolutions in North Africa and the Middle East drove oil prices sky-high.
But those were the obvious trends contributing to a tumultuous year for stock markets around the globe. Their impacts were far-reaching, so everybody was talking about them.
What people aren't talking much about is some of the less obvious effects those news items had on the market. The residue from such global unrest was a whole other subset of market trends that are receiving very little attention, but are trends every investor should know as we enter a new year.
1) IPOs Took it On the Chin
The uncertainty in the market scared off some companies from tapping into the public equity markets in 2011.
Worldwide, 1,243 IPOs raised $160 billion for the year – the lowest totals for both numbers since 2009. And the fear was justified. Those companies that did go public didn't fare too well. Of the stocks that debuted in 2011, 62% of them finished the year below their IPO price, and 70% were below their first-day closing price. By comparison, only 33% of IPOs in 2010 finished below their initial price.
With uncertainty still dominating the market, don't be surprised if 2012 is another light year for the IPO market. Some companies didn't have the appetite to start trading in such a volatile marketplace last year, and may be even less inclined to go public now that so many of their peers got hammered over the past 12 months. For investors, the poor performance among new stocks in 2011 should send a loud and clear message: IPOs aren't worth the risk right now.
2) It Wasn't a Stock Picker's Market
S&P 500 stocks and the index itself were the most correlated they've been in 80 years. Though the index was all but flat for the year, the S&P took plenty of twists and turns in 2011, finishing either up or down at least 2% on 35 different days – up from 22 days the previous year. About 84% of S&P 500 stocks moved in the same direction as the S&P index itself on a daily basis. That meant that, by and large, investors could forgo doing hours of intensive research into specific stocks and instead devote their efforts to getting in and out of the market at the right time.
Given the extreme volatility in the market, however, that didn't make investing any easier in 2011. If anything, the strong ties between stocks and the market itself made life harder for investors. It's difficult to pick a stock in a year when performance is so closely tied to the direction of the market – especially when the market is subject to as many outside factors as it was in 2011.
3) 10-Year Treasury Bonds Hit Their Lowest Level in 34 Years
As the situation in Europe worsened, investors pumped cash into Treasurys, causing prices to rise and yields – which move inversely to prices – to fall sharply. U.S. Treasury bonds with maturities of more than 10 years gained an average of nearly 30% in price, while 10-year Treasury note prices were up 17%. As a result, 30-year Treasury yields dipped below 3% and 10-year yields fell to 1.9% – the first time 10-year yields had sunk below 2% since 1977.
Economists are saying the decline won't stop there. Many are predicting that 10-year yields could fall to as low as 1.5% early this year. They're already on their way, dipping to a 1.84% yield earlier this week.
With so many investors jumping into the U.S. Treasury pool, yields will continue to slump – at least in the immediate future. A better short-term safety investment is dividend stocks. S&P 500 stocks paid $240.6 billion in dividends last year – the most since 2008. Telecommunications stocks paid an average dividend yield of 5.9%, utilities stocks had 4.1% yields, and health care stocks had 3.7% yields.
Better yet, the stocks themselves are increasing in price. Dividend-paying stocks listed on the S&P 500 produced an average return of 1.5%, easily outperforming non-payers, which were down 7.5% for the year. The top 100 stocks in the S&P by dividend yield were up an average of 3.7% before factoring in their dividend payouts.
As uncertainty remains, dividend stocks will continue to thrive. And with most dividend stocks offering higher yields than bonds, they are a more profitable safe haven than the U.S. Treasury at the moment.