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Investors Almanac for 2012: Clouds Give Way to Sun

BOSTON (TheStreet) -- This year has been a Groundhog Day existence for investors: One market-changing event after another setting off unprecedented ups and downs with no clear sense of direction.

Amid the Sturm und Drang, the S&P 500 Index of the biggest U.S. companies is little changed, down 1.5% so far in 2011. Maybe that 0.5% interest rate from a Bank of America checking account is a better option, after all. At least you know what you're getting.

The 80-year record in volatility, or the swing in equity prices, doesn't look like it's going to change any time soon, given the challenges ahead, which range from the imminent collapse of Greece and its drag on the eurozone's already slowing growth, to China's unpredictable future, to the still-frail U.S. economy as the nation approaches what is likely to be a gloves-off presidential election year.

"Volatility is a part of the new normal," Sam Stovall, chief equity strategist for Standard & Poor's, told TheStreet in an interview. Pimco, the California mutual-fund manager that oversees the world's biggest bond fund, coined the term "new normal" to mean a period of slow economic growth in the aftermath of the credit bubble and heightened competition from emerging economies.

According to research by Northern Trust (NTRS) Chief Investment Strategist Jim McDonald, "trading in the Dow Jones Industrial Average during the past 11 years (2000-2011) has been more volatile than any time during the last 100 years, with the exception of the 1930s." The 30-member Dow has fared better than the S&P 500, rising 2.8% this year.

And what better example of volatility than the events of October? The near-bear market trough on Oct. 3 was followed by the biggest one-month market rally since December 1991. But investors made no money this year after the "lost decade" that looked eerily like Japan's, another modern economy that's lost its way.

Among the contributions to the daily market swings are geopolitical upheavals on the order of those not seen since the 1970s, the growth in high-frequency trading, and the increasing use of leveraged and inverse exchange traded funds by investors seeking to hedge their portfolios against that volatility, Stovall said.

"Stock-market volatility will likely not recede until the worst of Europe's problems are in the rear view mirror," Northern Trust's McDonald said in a recent research note.

Even if the current set of international and domestic economic challenges come to a less-than-cataclysmic conclusion, a laughable prospect at the moment, many individual investors may be out of the market for good.

"An investor who lets his portfolio decision-making be based on emotion in this kind of environment will be buying and selling at exactly the wrong time," said S&P's Stovall. "They're shooting where the rabbit was, or playing whack-a-mole" with their portfolio. "That's why they come to think of it as gambling."

Stock quotes in this article: NTRS, UBS, DB 

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