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A surprisingly good vintage as market logs gains

Published on NewsOK Modified: December 31, 2012 at 4:44 pm •  Published: December 31, 2012

Speculation that the Federal Reserve was set to provide the economy with more stimulus to prevent it from slipping back into recession also bolstered stocks.

The rally even survived a blip when a software glitch at trading firm Knight Capital threw stock prices into chaos Aug. 1.

The firm said the problem was triggered by new trading software it installed. Erroneous orders were sent to 140 stocks listed on the New York Stock Exchange, causing sudden price swings and surging trading volume.

Apple launched the iPhone 5, the latest version of its smartphone, in September, and the company's stock climbed to a record close of $702.10 on Sept. 19. That gave Apple a market value of $658 billion, and many analysts predicted more gains lay ahead.

By the time Fed Chairman Ben Bernanke announced Sept. 13 that the U.S. central bank would start a third round of its bond-purchase program, which is intended to push longer term interest rates lower and encourage borrowing and investment, the S&P 500 had surged 14 percent from its June 1 low. A day later, the index peaked at five-year high of 1,466. The Dow Jones reached its peak for the year of 13,610, Oct. 5.

As is often the case on Wall Street, investors "bought the rumor and sold the fact," and quickly turned their attention to the challenges that lay ahead.

Analysts had also been cutting their outlook for growth in the final quarter of the year. At the start of the second quarter, estimated earnings growth for the period was 15.7 percent. That forecast had fallen to 3.4 percent by Dec. 27.

"One of the blessings that supported the stock market's moves in prior years was earnings growth," said Lawrence Creatura, a portfolio manager at Federated Investors. "That's true this year, but at a decelerating rate. It's not gone unnoticed that earnings growth is slowing, and many forecasts now include a full stall."

Apple's halo also began to slip in the final three months of the year. Its iPad Mini tablet, launched Nov. 2, met with lukewarm reviews, there were hints of unrest among its executive ranks. Investors began to fret that the intensifying competition in the smartphone market would crimp Apple's profits. The stock tumbled, and despite rallying in recent days is still down 27 percent from its September peak.

The year's final twist came in Washington.

Stocks wavered ahead of a presidential election that at times seemed too close to call, and while President Barack Obama ultimately reclaimed the White House by a comfortable margin, the Republicans retained control of the House.

The divided government set the stage for a tense end to the year as Democrats and Republicans sought to thrash out a budget plan that would avoid the U.S. falling off the "fiscal cliff," a series of tax hikes and government spending cuts that economists say would push the economy back into recession.

Initially, markets fell as much as 5 percent in the 10 days after the elections as investors worried that a divided government would not be able to agree on a budget plan to cut the U.S. deficit.

While the S&P 500 managed to recoup those losses by December on optimism that a deal would be reached, some investors are still urging caution. Any agreement will still be "ill-tasting medicine" to the economy, as it will almost certainly involve both spending cuts and tax hikes, says Joe Costigan, director of equity research at Bryn Mawr Trust Company.

"The question is, how much will the drag from the government be offset by business and personal spending," says Costigan. "The market has reasonable expectations for growth priced in, so I don't think we're going to see a big run-up."