U.S. stocks end higher despite negative news much of year
Despite all the cliff drama in the past week that sent stocks spiraling downward, all three major U.S. stock indices ended the year higher — which might come as a surprise to many investors

U.S. stocks rallied Monday in the last hours of trading for 2012, as it appeared Washington lawmakers had reached a deal to prevent a combination of automatic spending cuts and tax increases known as the fiscal cliff.

Despite the recent political drama that sent stocks spiraling downward, all three major U.S. stock indices ended the year higher — which might come as a surprise to many investors

"If you just read the headlines and took people's pulse, you would think the market was down 5 to 10 percent," said Andy Brooks, head of U.S equity trading at Baltimore-based T. Rowe Price. "It's the most unloved good market I have seen in a long time."

The widely watched Dow Jones industrial average, made up of 30 stocks, rose 7.3 percent for the year to close at 13,104. The tech-heavy Nasdaq composite index gained 15.9 percent to end the year at 3,019. And the S&P 500 Index, a broader measure of performance of the largest companies, increased 13.4 percent, winding up at 1,426.

A year ago, only the Dow ended the year up.

Certainly, 2012 had plenty of bad news beyond the fiscal cliff to shake investors' confidence and keep them on the sidelines.

There was the plodding U.S. economy, accompanied by stubbornly high unemployment. The recession in the Eurozone and the slowdown in China. The much-hyped but highly disappointing initial public offering by social network giant Facebook. An interest-rate fixing scandal involving some of the world's biggest banks. And the contentious presidential election.

"It didn't feel like a great year," said Wayne Lin, portfolio manager with Legg Mason Global Asset Allocation in New York, "It's not like it was driven by euphoria. This is the little market that could. It kept chugging along."

Added Chuck Carlson, CEO of Horizon Investment Services in Indiana, "It goes to show you that there is always a lot of noise out there, but at the end of the day, the things that drive stocks higher are corporate profits, interest rates and inflation."

Corporate profits for the most part continued to beat expectations, and Carlson predicts that 2012 may be an all-time high for earnings. Interest rates remained extremely low, which tends to make stocks more appealing than other investments, Carlson said.

"Inflation has remained fairly benign, particularly wage inflation, which is most detrimental to stocks," he said.

The year also has been good for Maryland stocks. The Bloomberg Maryland Index, which gauges the performance of more than 60 area companies, was up about 21 percent for the year, led by W. R. Grace and Under Armour.

"Maryland is very fortunate," said John Boo, a senior portfolio manager with Chapin Davis, a Baltimore investment firm.

The state has a highly educated workforce and the highest median income in the country. And Maryland benefits from its close proximity to Washington, he said.

"We're not Silicon Valley, but there is a lot of government spending and positive fallout from that," Boo said.

Yet many investors missed out on these gains. Still scarred by the market crash in late 2008, risk-averse investors continued to flee stocks and rush into bonds.

According to the latest figures from the Investment Company Institute, net outflows from stock mutual funds reached nearly $122.5 billion in the first 11 months of the year, while net inflows into bond funds totaled $296.3 billion. ICI preliminary figures for December show this trend out of stocks and into bonds persisted.

"It's just been a series of things that caught the attention of … clients and had them take pause and wind down some of their holdings," said Steve Quirk, senior vice president of trading for TD Ameritrade in Chicago.