Wall St Week Ahead: You thought 2011 was tough?

NEW YORK, Dec 30 (Reuters) - Shaky Europe. Political gridlock. Volatile markets.

Familiar themes for those who lived through 2011, and investors should be ready to revisit them next year.

With a spiraling debt crisis in Europe, political upheaval around the
world, and crumbling creditworthiness in major industrial nations, 2011
was a tough year to know where to invest. 2012 is unlikely to offer much
respite.

The S&P 500, a measure of the biggest U.S.
companies' market value, spent much of the year getting pushed up and
down, flummoxing shorts and longs - and scaring Moms and Pops away from
stocks. It ended the year at 1,257.60, down a mere 0.04 of a point.

But the S&P 500's tepid performance was encouraging, compared with
other world equity markets. The United States may still be seen as a
safe haven, though even that looks uncertain.

For every rally
built on improving economic figures this year, selloffs were never far
away on worries the European debt crisis would eventually drag the
continent into a recession and perhaps the United States as well. That
could continue in 2012.

China and other fast-growing emerging
markets can no longer be leaned on as those economies slow. In 2011's
last half, the poorest-performing sectors outside of banks were most
connected to global growth - materials, energy and industrial companies.

"There is a growing realization that the global economy is in
jeopardy," said Bruce Bittles, chief investment strategist at Robert W.
Baird & Co in Nashville. "There is uncertainty in every corner of
the world."

That uncertainty fed substantial volatility in 2011.
Despite the S&P's flat performance this year, there were 66 trading
days when stocks moved in a 2 percent range. In 2008, when Lehman
Brothers collapsed during a global financial crisis, there were more
than 130 trading days when stocks swung that much. But that led to a
flight from equities by retail investors.

U.S. equity funds had
outflows in every month since May. More than $483 billion left U.S.
mutual funds in 2011 through the year's second-to-last week, even though
the U.S. market outperformed foreign stocks late in the game.

BEATING GLOBAL RIVALS

The S&P 500 ended the year off a scant 0.003 percent, the closest
it has come to unchanged since 1947, according to Standard & Poor's.
The Dow Jones industrial average finished 2011 with a 5.5 percent gain,
while the Nasdaq Composite Index slipped 1.8 percent.

In contrast, the MSCI world stocks index fell 9 percent, while the FTSEurofirst-300 index slid nearly 11 percent.

The darlings in the emerging markets fared the worst. China's Shanghai
Composite index lost 22 percent, India's BSE sank 25 percent, and
Brazil's Bovespa dropped 18 percent.

Strategists say the U.S.
stock market may benefit from reasonable economic growth and attractive
market valuation. The S&P 500 is expected to rise 6 percent by the
end of 2012, according to the most recent poll of Wall Street
strategists.

When Wall Street gets back to work on Tuesday, it
will face a holiday-shortened week and a slew of economic indicators.
The most crucial numbers will come on Friday when the government will
release the December non-farm payrolls report. Economists polled by
Reuters expect a December gain of 150,000 jobs, compared with an
increase of 120,000 jobs in November.

Volatility is likely to
persist through early 2012 because of the uncertainty in Europe and
rising concern about slowed earnings growth due to recent revisions.

The S&P 500's price-to-earnings ratio - what investors are willing
to pay for a dollar of earnings - is under 12, below the 25-year average
of 15. In weaker markets like Germany's DAX, the figure is below 9.

"We're building in a massive recession into these numbers," said Marc
Pado, U.S. market strategist at Cantor Fitzgerald & Co. in San
Francisco.

U.S. companies cutting earnings' outlooks recently
outpaced those raising theirs by the greatest ratio in 10 years. Some
sectors, such as materials, have seen a sharp drop in forecasts for the
fourth quarter, Thomson Reuters data showed.

Last week, downbeat
earnings from Oracle Corp shook confidence in the tech sector's health
before the quarterly earnings season's start in January. Oracle joined a
growing list of companies, including some of TECHNOLOGY []'s biggest
names, whose results and outlooks have set off alarm bells.

Next year, S&P 500 earnings are seen rising 9.9 percent, down from an estimate of 13 percent in October.

RECESSION FEARS

Many economists believe the euro zone is already in recession. They
forecast that the economies of the 17-nation bloc will stagnate in 2012
after contracting in this year's fourth quarter and the first quarter of
the next.

Investors are worried that Italy and Spain will have
to keep refinancing borrowings at unsustainable levels early next year,
which could escalate the crisis.

The correlation between the
U.S. stock market and the euro skyrocketed in 2011 as investors tied
bets on risky assets to the euro's moves. That trend ebbed as equities
rallied near the end of the year, but it is likely to flare up again.

So far the U.S. economy has stayed on course for moderate growth.
Economists expect it to expand by about 2.1 percent next year. But it is
unclear how a slowdown in the rest of the world will affect the economy
stateside.

The key may be China rather than Europe.


"China is the 800-pound gorilla in the room and is probably the most
important country to watch in terms of their contribution to global
growth," said Michael Sheldon, chief market strategist at RDM Financial
in Westport, Connecticut.

Chinese business confidence is weakening. A survey showed export orders fell for the first time in nearly three years.

The drop in materials shares in 2011's second half reflects worry about
declining activity overseas. The S&P Materials Index lost nearly 14
percent in the last six months.

GRIDLOCK SHOCK

One of
the pivotal events of 2011 was the downgrade of the United States'
perfect triple-A credit rating. Standard & Poor's cited
congressional bickering as the reason for the downgrade.

August's stalemate in Washington over raising the debt ceiling sparked a selloff that accelerated after the downgrade.

Investors expect the gridlock in Congress to get worse as the U.S.
presidential election approaches in November. The election is likely to
be close, which will not make legislative efforts to tackle high debt
levels and weak demand any easier.

Rancor was in view again in December as Congress struggled to pass a two-month extension of U.S. payroll-tax cuts.

"There will be less certainty about taxation and regulation so that
will inhibit business formation and business growth," said Brian Battle,
a trader at Performance Trust Capital Partners in Chicago.

Goldman Sachs sees global growth highly susceptible in 2012 to even minor shocks - and those shocks may be political.

"Slowing growth (and in places outright contraction), public-sector
cuts, and a renegotiation of the social compact between state and
society in different parts of the world is an environment ripe for
political turmoil," Goldman said in a note to clients.