In the wake of one of the most volatile years ever for stocks, safety will be a key theme among investors in 2012.
Safety was something most major indexes around the world couldn't provide in 2011. Worldwide, stocks were down 8% for the year, according to the MSCI Global Index. However, many regions of the world fared far worse: European stocks fell 18%; China stocks dropped 20%; Brazil stocks took an 18% hit. Not surprisingly, Greek stocks performed the worst, plummeting more than 50%.
By comparison, the U.S. stock market emerged from the chaos of 2011 relatively unscathed. The S&P 500, the benchmark index for U.S. equities, was virtually flat for the year, down a measly 0.04 points. But the S&P's flat net result was not indicative of the extreme volatility the index experienced throughout the course of the year.
There were 35 days in 2011 in which the S&P 500 moved up or down at least 2%. By comparison, such pronounced one-day swings occurred only twice in 2005 and 2006 combined.
In addition to day-to-day volatility, U.S. stocks also experienced ups and downs throughout the year. In late April, the S&P 500 was up 8.4% for the year. By October 3, the index was down 13% for the year. The market reversed course during the rest of October, posting the largest monthly gains the S&P had seen in 20 years.
There were plenty of reasons behind the market's schizophrenic nature. Europe's sovereign debt problems have spread like wildfire, starting in Greece and making their way to Italy, France, Portugal and Spain.
The U.S. had its own debt problems in 2011. The country nearly defaulted on its debt in early August due to some pointless partisan bickering in the U.S. Congress. That was soon followed by Standard & Poor's first-ever downgrade of the U.S. credit rating, from triple-A to double-A. While the U.S. narrowly avoided default, the showdown in Washington demonstrated the inability of politicians to get things done and wreaked havoc on investors' psyches.
Other factors that kept stocks in a constant state of uncertainty in 2011 included a catastrophic earthquake and tsunami in Japan; mass uprisings and governments being overthrown in Egypt, Libya, Syria and other parts of the Middle East and North Africa; and high unemployment rates continuing to plague the U.S. economy.
Many of these issues will continue to linger into 2012. Chances are the European debt crisis and slow economic growth here in the U.S. will hang like a dark cloud over the stock market for much of the year. With that in mind, investors will do well to seek refuge from the turmoil in safe havens such as natural resources and dividend stocks.
Gold is a good place to start. The yellow metal continued its rise in 2011, gaining 10% to finish the year at $1,565 an ounce. At one point gold vaulted even higher than that, reaching an apex of $1,888 an ounce in late August.
Despite the year-end pullback, gold prices today are nearly six times what they were a decade ago. Compare that with a stock market that is essentially flat, and it's easy to see why gold must be on the table for investors today.
With so much uncertainty surrounding the dollar and the euro, the price of gold should continue to climb in 2012. Buying gold now, or investing in gold as an asset class via the SPDR Gold Shares (NYSE: GLD) exchange-traded fund, is a smart hedge against volatility in the markets and other currencies. Gold has proven to be a safe haven in recent years, immune to the whims of the global economy. I'm expecting that trend to continue in 2012.
For income investors who want protection from the wild swings in the market, dividend stocks are a smart bet. And when investing in a dividend stock, big-name, blue-chip stocks are a good place to start. The 10 biggest dividend payers among S&P 500 stocks boast an average dividend yield of 7.3%, outpacing the 1.9% yield you can get from a 10-year U.S. Treasury bond. Why on Earth would an investor settle for a 1.9% yield from the U.S. Treasury when he or she can earn nearly four times more in regular income with some of the top dividend stocks?
That's an especially pertinent question given the current risk involved with investing in the U.S. Treasury. The 30-year U.S. Treasury bond was up nearly 20% in 2011, double the rise of gold. That's an enticing proposition at first glance. But safe bonds don't typically yield 20% in one year. And given that the U.S. credit rating was just downgraded, Treasuries are due for a correction in 2012. Interest rates are bound to climb soon. When that happens, it will eat away at principal.
High-yield dividend stocks are a much wiser – and more profitable – investment.
In essence, the flight to safety for investors is a flight to quality. Gold is a time-tested, proven commodity. Blue-chip stocks generally earned their lofty perch in the market through years of healthy bottom lines, steady cash flow and generous dividends.
Gold and dividend stocks have been safe havens for years. But given the stormy economic climate, the shelter they provide for investors has rarely been more necessary.