Market climbed a wall of worry last year, and has plenty of worries still ahead

We had recession in Europe, a slowdown and leadership transition in China, an expensive and divisive U.S. election and then a cliffhanger tax vote in Congress. If you had seen all that coming, you might have thought it best to avoid owning stocks.

You would have been wrong. The Standard & Poor’s 500, an index of blue-chip stocks, delivered a total return of 16 percent last year, including dividends.

We’ve now seen double-digit gains in three of the past four years, and the major indexes have doubled from the lows they hit in March 2009, in the depths of the recession.

The gains haven’t yet rekindled Americans’ enthusiasm for stocks. According to figures from the mutual fund industry, money flowed out of domestic stock funds during every single month of 2012.

If baby boomers are gradually adjusting their portfolios, taking money out of risky assets as they approach retirement, that’s not necessarily a bad thing. However, investors also may be paying too much attention to the scary headlines.

Mark Keller, chief investment officer at Confluence Investment Management in Webster Groves, says that when he met with clients last year, “I felt and heard a level of fear and foreboding that I hadn’t heard in many years. I think the political rhetoric had a lot to do with it.”

Many studies show that individual investors earn subpar returns because of poor timing. They sell after a big market crash, and don’t buy back in until stocks have already posted big gains.

“For all sorts of behavioral reasons, people are less willing to own stocks than they were,” says Norman Conley, chief investment officer at JAG Advisors in Ladue. “Investors’ psyche has been badly damaged.”

That could begin to change in 2013, he said. It would help if Congress gets its act together and, say, raises the debt limit in February without another fiscal-cliff-style standoff.

The market could work its own psychological magic, too. As of Friday, the Dow Jones industrial average was just 5.4 percent below its high-water mark of October 2007.

If the market hits a new high, signaling that it’s fully recovered from the losses of 2008 and 2009, investors might finally stop pulling their money out. Even though they’d be repeating an age-old destructive pattern — selling low and buying high — an influx of individuals’ 401(k) money might be enough to propel the market to another good year.

Stuart Freeman, chief equity strategist at Wells Fargo Advisors, is predicting a 7 percent to 10 percent increase in the stock market this year, partly because he thinks the big-picture issues are becoming clearer.

“We’re at least past the beginning of negotiations over the ‘fiscal cliff’,” Freeman said. “Europe could bottom out, and growth in China has picked up. All those things make for a better environment going into 2013.”

A stock market bear might argue that both the U.S. and Europe still have plenty of problems to work through, while corporate profits — a key determinant of stock values — are running out of steam.

Freeman thinks the S&P 500 companies’ profits will grow 5 percent next year, with most of that driven by growth in top-line sales.

As for the scary headlines coming out of Washington, Conley advises investors to ignore them. “Everything doesn’t have to go right,” he says. “If just a few things go right, it could be enough to push us into a strong upside scenario.”

If you doubt that, look at Europe. The eurozone remains mired in recession, but stock prices climbed 29 percent in Germany last year and 15 percent in France.

Call it the triumph of low expectations. When things look darkest, the stock market can sense a faint glimmer of light in the distance.

That’s the time to buy, not after the gloom has lifted.