Stock indices ended 2011 just as they started the year: Markets, across the board, were flat. The S&P 500 rose just 2.7 percent, compared with 15 percent in the previous year. Meanwhile, the Dow Jones Industrial Average rose just 5.5 percent in 2011--better than the S&P, but well below its 11 percent gain in 2010.
But there's a bright side to this underperformance. According to the Stock Trader's Almanac, since 1930, each year that the S&P had a flat year, it rebounded 13 percent in the following year.
[See top-rated funds by category ranked by U.S. News Mutual Fund Score.]
Analysts agree that 2012 provides a great opportunity for investors. Stock prices are relatively affordable and all signs are pointing toward a rebound.
"There is potential for better returns," said Joseph Veranth, chief investment officer and portfolio manager at Dana Investments in Milwaukee. "The market got cheaper [in 2011] and there is room for growth here in the new year."
According to Veranth, there are a number of sectors that are especially attractive investments. Depending on how the year progresses, an early investment in these sectors could mean big payouts a year from now.
A bounce-back for banks. Financial stocks were some of last year's lowliest performers. Financial ETFs (exchange-traded funds) were the worst performing sector in 2011. Bank of America, widely seen as a barometer of the health of the financial sector, was down 60 percent last year, making it the worst performer in the entire Dow Jones Industrial Average.
But according to analysts, banks are primed for a comeback. One of the main reasons is political: Most of Wall Street believes the economic policies of President Barack Obama's administration have been bad for big banks. If a Republican replaces him--a real possibility--Wall Street believes regulations will swing back in its favor. "This is a sector that's moving now based on presidential possibilities," Veranth said. "Large bank stocks will continue to rebound based upon the possibility of a Republican president."
Evidence to date favors a rebound. Just 11 days into the new year, shares of Bank of America have already gone up 22 percent. Other financial stocks are performing similarly well. If Veranth and other Wall Street analysts are correct, now is the time to buy financials.
[See Does Stock Forecasting Work?]
Material stocks a good bet. The material sector covers a wide range of companies that all have one thing in common: They all produce a raw material used by other industries. This includes the production of glass, paper, chemical, metals, minerals, and construction material.
Like the financial sector, material stocks had a rough 2011. The sector was down nearly 13 percent for the year. As the real estate market remained weak, fewer people were buying houses, lessening demand for construction materials. In addition, many businesses that use materials to produce their goods held off on expansion, fearing another economic downturn.
According to analysts, this sector should improve in 2012. As the economy shows increasing signs of life, businesses are investing and using more materials. An economic uptick would also help the stagnant housing market. "We're already seeing a rebound in the materials section," Veranth said. So far this year, the materials sector of the S&P 500 is already up 1.8 percent.
[See Why Mid-Caps Stand Out in This Slow-Growth Stretch.]
Danger, and opportunity, in Europe. The European debt crisis caused roller-coaster fluctuations on world stock markets in 2011. This volatility compelled many investors to retreat to the relative safety of the bond market, which provided slow but steady growth.
This year, however, analysts believe that large investment in bonds is too safe a bet. With the U.S. showing signs of sustained recovery, equities are a better investment. "[Last year] was a relatively strong year for fixed income," Veranth said. "We don't expect the same sort of returns in 2011. In fact, we predict low single digits or lower."
The continuing crisis in Europe also provides an investment opportunity, according to Veranth. Few expect the outcomes in Europe to be good. In fact, investors have been betting against recovery for most of 2011. This has sent the price of large multinational companies like General Electric down.
[See Why Mutual Funds Make Sense in a Volatile Market.]
Veranth believes, however, that the price for multinationals has been pushed too low.
"Earnings estimates for a lot of large companies have come down significantly. Some of them may have come down too much," Veranth said. "Large multinationals can invest wherever they need to around the world. Even when Europe was relatively healthy, there was significant growth in South America and Asia. There's more room to grow."
Twitter: @davidcfrancis
More From US News & World Report
4 comments