The S&P 500, the investment community’s most widely-watched index, fell in the last few minutes of today’s trading session to close the year at 1257.60.  It closed 2010 at 1257.64.  We finished a year marked by surging corporate profits, mega-doses of government stimulus, plummeting treasury bond yields, headline-grabbing bankruptcies of American Airlines and MF Global, ongoing armed conflicts, overthrows of Middle Eastern governments, violent protests in Europe, “Occupy” protests here at home, unresolved housing and unemployment problems, our AAA credit rating diminished, politicians who can’t craft a compromise, and European banks and countries on the edge of bankruptcy.  All that action notwithstanding, the S&P 500 closed the year virtually unchanged.  Beyond the S&P, the Dow Jones Industrials and Utilities tacked on gains, while the Dow Transports, Nasdaq Composite, New York Stock Exchange Composite, Mid-caps, Small-caps and the most inclusive Dow Jones Total U.S. Stock Market Index all showed losses.  Overseas the carnage was more significant, with both emerging and developed markets falling.  All but a very few countries experienced declines ranging from about 15% to 40%.  Not a happy year for equity holders.

We enter 2012 with hope but with far more questions than answers.  Let me list a few:

• Will recently improving employment, manufacturing and consumer confidence statistics continue into the new year as government stimulus and tax incentives wind down?

• Will housing prices halt their declines in 2012?

• Can we make a meaningful dent in the overhang of homes for sale?

• With Real Disposable Personal Income now declining, will the U.S. consumer continue to cut his/her savings rate in order to maintain spending?

• Can U.S. corporations continue to grow earnings in an environment of weak housing and massive unemployment?

• Will our major political parties reverse the trend of moving farther away from common ground?

• Will Occupy Wall Street simply mark the beginning of growing social unrest?

Europe and the Euro were the dominant financial stories in 2011.  With their multiple problems still unsolved, these are likely to remain the primary themes at least through much of 2012.  That probability raises additional questions.

• Can the Eurozone escape a serious recession despite rapidly declining economic indicators?

• Can several European countries roll over massive amounts of debt coming due in 2012 at rates that will not worsen already serious debt conditions?

• Can the Eurozone hold together?

• Will more European countries introduce austerity programs sufficient to meet Eurozone standards without sinking their economies?

• Will the European Central Bank need to obtain a changed mandate to print its way out of the worsening debt crisis?

The United States is faced with an equally problematic debt dilemma, although less imminent.  We have so far been spared European-type pain, because the world remains willing–even eager–to fund our massive deficits.  Whether or not we begin to experience Europe’s problems depends upon the sustainability of investor confidence.  The reality is that we can never pay for all our past promises with a dollar possessing anything like its current value.

• Will our politicians cobble together a debt reduction plan to sufficiently placate rating agencies in order to keep the U.S debt rating from being lowered further?

• Will the Federal Reserve resort to some form of QE3?

• Will we begin to renege on some past promises, either domestic or international, to keep budgets from exploding?

• Will we ultimately resort to dramatically rapid money printing?

• Will foreign sources continue to buy U.S. debt at historically low interest rates despite our huge deficits?

• Will gold prices rise for the twelfth consecutive year if investors fear the inevitability of massive money printing?

Many bullish investors argue that, despite growing debt problems in the developed world, the emerging economies will provide the engine of growth that will keep the world financially steady.  That prospect raises some difficult-to-answer questions.

• Why did the world’s emerging country stock markets significantly underperform those of the developed world in 2011?

• Why did the stock market of China, the economic giant of the emerging countries, fall precipitously in 2011?  Why is it down by almost two-thirds over the past four years?

• The most powerful influences on markets often flow from events that are totally unanticipated. What currently unforeseeable events, good or bad, will unfold in 2012?

With so many open questions facing investors in the coming year, we will remain extremely flexible and ready to adapt to the unfolding story.

As we close 2011, we wish you and your families a new year filled with good health, happiness, peace and prosperity.