YAHOO [BRIEFING.COM]: A flurry of afternoon selling left the major averages to settle at session lows. That basically put the S&P 500 back where it started the year. Although investors may not have scored the absolute return that they wanted, the stock market still exhibited relative strength while most of the world's other major equity averages suffered double-digit percentage declines in 2011. 

Stocks displayed strength in the first part of the year. Specifically, the S&P 500 built on a 2% gain in January so that it was up more than 8% by the end of April. Things turned more volatile by summer, though. By early August, the broad market measure was down 11% on a year to date basis. The stock market's reversal came amid string of caustic events that included a spike in energy costs related to civic and social unrest in the Middle East and North Africa, the aftereffects of a massive earthquake and tsunami in Japan, the eurozone’s sovereign debt crisis, and debilitating debt ceiling negotiations in the U.S. that preceded the decision by analysts at Standard & Poor’s to downgrade the U.S. debt rating from AAA to AA+. 

This year may have seen highly correlated and extremely volatile trading action, but fundamental factors ultimately provided support throughout the year. Despite that, they took a back seat to macro themes that drove large, headline-driven swings. 

Some of the more notable themes that contributed to the volatility of 2011 are discussed in greater detail below.

• Middle East Tensions Evolving into Arab Spring: The first obstacle to a smooth 2011 was the escalation of tensions in the Middle East. This began in late 2010 with Tunisia and intensified with Egypt. Libya became a focal point of revolution in the region. The transition to freer societies is a positive, but accompanying uncertainty in the oil-rich region sent energy prices drastically higher. That induced equity market volatility and economic concerns before the price spike subsided. 
• Japan's Earthquake/Tsunami: Damage in Japan from what was reported to be the most powerful earthquake to ever hit the country caused a nuclear crisis and derailed production in the country. The toll on the country's economy created concerns for the global economic recovery. 
• European Debt Problems: The problems for the European Union were a nettlesome factor all year. The troubles of Greece, Ireland, Italy, Spain, and even France created precarious conditions in the core and periphery of the continent. Fears intensified as regional leaders struggled to craft comprehensive solutions to prevent a systemic banking crisis. The toll on confidence and the resulting economic outlook resulted in higher risk premiums and lower prices for risky assets such as stocks and the debt of risky European countries. European debt yields have come off of their highs, but they remain at historically high levels and present problematic funding costs.
• U.S. Debt Debacle and Subsequent Downgrade: Although Europe’s fiscal problems are much more of an immediate concern than what the U.S. faces, the eventual increase of the U.S. debt ceiling was a disappointing process. Most market participants had believed lawmakers would come to an agreement, but the process became dramatic and drawn-out. That chipped away at confidence in the abilities of legislative leaders. And even though a temporary deal was eventually reached, analysts at Standard & Poor's took the unprecedented step of downgrading the U.S. credit rating, which now stands at AA+, down from AAA. Analysts wrote that the downgrade reflected opinions that fiscal consolidation plans fall short of what would be necessary to stabilize the government's medium-term debt dynamics.  

Other Themes of 2011: 

• Earnings Growth Remained Strong, Market Valuation Attractive: The S&P 500 earnings estimates on an adjusted basis for 2011 are up 3.2% over the last 12 months as companies continue to exceed the Street’s expectations. Annual earnings growth is now expected to approach 12% after growing 38% in 2010. As for 2012, earnings growth of nearly 9% is widely expected. In turn, the S&P 500 currently trades a little north of 12x adjusted FY12 earnings estimates. One year ago, with the S&P 500 trading at almost the same price level, the stock market traded at a little less than 14x FY11 earnings estimates. 
• Monetary Policy Changes Form but Remains Accommodative: The end of the Fed's second installment of quantitative easing came in early summer. It was replaced by a more unconventional policy involving selling shorter maturity issues and purchasing longer-dated bonds so as to keep long rates low and extend the maturity of the Fed’s portfolio. The Fed has stated it wants to keep rates low until at-least mid-2013. 
• IPO Market Stymied by Fall Volatility; 2012 Pipeline Strong: Initial Public Offerings (IPOs) slowed in number and capital raised. The 334 global offerings, which raised about $135 billion, represented a 30% decline from last year. Fervor fizzled amid concerns about Europe and the macro environment. 
• Occupy Wall Street Gains Steam: Protests about Wall Street pay and practices spread around the world despite its initial lack of direction and focus, but many became sympathetic to messages of resentment that the movement symbolizes. The movement may gain steam as the presidential election draws closer. 

It is widely believed that the European situation is the biggest risk for 2012, but it is generally factored in to market values. Other variables that are likely to play a part in market valuations and volatility include the trajectory of China’s economy, the political dynamics ahead of the 2012 U.S. presidential election, and geopolitical issues around the world.

The broad commodities complex closed out 2011 in mixed fashion, but strength among precious metals helped give the CRB Index a 0.3% gain for the session. That added marginally to the CRB's December gain, which totaled 2.4%, but did little to pare its annual loss, which amounted to 8.3%. Last year the CRB scored a 17% gain.

Among the more closely tracked commodities, oil prices slipped 0.8% to settle pit trade at $98.83 per barrel. Futures prices pushed more than 8% higher this year, building on the 15% gain that they achieved in 2010.

Natural gas prices closed pit trade at $3.08 per MMBtu, or flat for the session, but 30% below where prices started the year. That comes on top of the near 21% drop that they suffered last year.

As for precious metals, gold and silver both climbed 1.8% to settle pit trade at $1567.80 per ounce and $27.86 per ounce, respectively. However, gold prices climbed 10% this year, while silver prices slid 10% for the year. Last year, gold futures prices gained almost 30% while silver prices soared almost 84%.

DJ30 -69.48 NASDAQ -8.59 NQ100 -0.3% R2K -0.5% SP400 -0.5% SP500 -5.42 NASDAQ Adv/Vol/Dec 1196/1.05 bln/1398 NYSE Adv/Vol/Dec 1427/587 mln/1577