I’m writing this before the new year, but already the year’s market trends and investment themes have been established. The S&P 500 will likely finish 2011 with a modest gain—essentially a flat yearly performance for the index. The European sovereign-debt crisis ensnared the world’s developed economies this year, resulting in anemic gains or even losses for many global indexes, and priming fears of another global recession. Don’t buy into the negativity; 2012 should be a much better year for the market. 

Europe should finally resolve its debt crisis, particularly now that European Union (EU) member nations have agreed to the creation of a new treaty to form a more integrated fiscal union. While it remains to be seen if one or more peripheral nations will be forced to exit the EU, it increasingly appears that an orderly resolution will be achieved. Because of that, the risk of a second major recession has been averted.

Although global economic data have been lackluster over the past year, the global economy has still managed to stay in positive territory. So it would take a major disruption to push the global economy into another extended downturn. In this environment, the S&P 500 may not produce staggering gains in 2012, but it could return between 5 percent and 10 percent. 

The outcome of the 2012 US presidential election cycle could have a major impact on whether or not the market’s return is toward the high end or low end of that range.

Presidential election years are generally positive for the markets; 2008 was the only exception to that rule over the last 30 years. However, given the electorate’s discontent with incumbents—as measured by dismal approval ratings for both Congress and President Obama—the election cycle may not provide the market with its customary boost. But with the Republican race for the nomination in disarray, President Obama will likely win a second term in the Oval Office. 

Nevertheless, equities should perform well next year, particularly those in the technology, industrial and energy sectors. Despite continued weak US economic growth, commodities should outperform on the back of strong Chinese demand stoked by pro-growth monetary policies.

In the bond market, traditional safe havens such as Treasury bonds will pull back, while riskier assets such as corporates and junk bonds will finally outperform. Gold could also lose ground once economic fears abate.

Although the market will likely remain volatile throughout 2012, it should grant investors the kindness of positive gains.