Friday, March 6, 2009. It was hard to find many investors smiling on that day nearly two years ago as the S&P 500 reached an intra-day low of 666 (no, I am not mistyping). On that day, I had the following comments:
“We still firmly believe in the long-term value of the stock market. We know that we must find the best way to outperform inflation over the long-term … . Based on where we are today (the S&P 500 is now down 56 percent from its October 2007 high), the markets are a very attractive place to beat that inflation bogey … it will not take much to re-engage the appetite for investor risk. History shows that short-term market timing is a recipe for disaster, and missing out on the first part of a bull market can set financial plans back severely. From 1930 – 2008, over 40 percent of a bull market’s trough to peak returns occurred in the first 12 months. History also shows that during most of the economic declines since World War II, the stock market began climbing six months before the economy began its ascent.”
On Feb. 16, the S&P 500 closed at 1,336, more than doubling that March 2009 figure. Yes, a powerful 100 percent rally has been achieved in a span of approximately 23 months. In fact, this represents the third largest percentage gain for any 23-month period in the history of the S&P 500. Right on cue, the rally started before the recession officially ended in the summer of 2009. However, you would not know that the recession has ended by asking your neighbor. A recent Rasmussen poll found that 64 percent of American adults still believe we are in a recession, despite six consecutive quarters of GDP growth. Contrast that with a recent survey of economists, who put the risk of a new recession at only 12 percent.
Corporations are starting to buy in to the recovery, as M&A activity is percolating again and earnings continue to march forward. Over 80 percent of the S&P 500 companies have now reported fourth quarter earnings, and 71 percent of those have beaten expectations. Final 2010 earnings should tally just north of $80/share when all is said and done. Earnings expectations for 2011 are above $95. Yes, QE2 has done nothing but help the surge. However, with the S&P 500 currently at 1,340 (which translates into a 14.9 P/E multiple, based on a below-expectations $90 earnings level), there is a fundamental basis for the rise. The rapid earnings growth will abate, but when the aforementioned everyday American joins the party, expansion of these multiples could follow.
Don’t get me wrong. Volatility is not going away, and we will have pullbacks. Plenty of minefields still exist (squeezed corporate profit margins, unemployment, housing, the end of QE2, Chinese inflation and Middle East unrest to name a few), which keeps strategists like us always at the ready, but feel free to take a brief, deep breath and appreciate the past 23 months.
Mark Sorgenfrei Jr. is vice president and investment analyst for Waddell & Associates Inc.