Stock market bears are still waiting for the "new normal" to take hold.
The Standard & Poor’s 500 Index rose 13 percent in 2010, bringing the advance since March 2009 to 86 percent, the biggest rally for a comparable period since 1955, according to data compiled by Bloomberg and S&P. The improving economy and record earnings sent the benchmark index for U.S. equities to the largest gain for consecutive years since 1999, the data show.
The increase is challenging Pacific Investment Management Co.’s "new normal" theory from May 2009 stating that returns on financial assets would be below historical averages because of government budget deficits and increased regulation. U.S. equities have returned 6.2 percent a year since 1900 before dividends, according to inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG in Zurich.
“Over the vast majority of the last two years, the strongest voice out there has been that this is a high-risk environment, that returns and expectations are going to be subnormal for years,” said James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $340 billion. “The results couldn’t be more opposite than that.”
The S&P 500 rose 0.1 percent to 1,257.64 this week, extending its biggest December rally since 1991 and boosting its 2010 gain to 13 percent after a 23 percent rise in 2009, the biggest two-year advance since the Internet boom in 1998 and 1999. The Dow Jones Industrial Average climbed 4.02 points, or less than 0.1 percent, to 11,577.51 this week, extending its yearly increase to 11 percent.
Caterpillar Inc., DuPont Co. and McDonald’s Corp. jumped more than 22 percent in 2010 to lead gains in the 30-stock Dow while consumer and industrial shares drove the S&P 500 to a valuation of 15.8 times reported profit, the highest price-earnings ratio since June. Stocks rallied after the Federal Reserve pledged to buy $600 billion in Treasuries to stimulate the economy.
“I remain profoundly bearish because we’re just kicking the can down the road,” said David Tice, president of Tice Capital and creator of Federated Investors Inc.’s Prudent Bear Fund. “Printing money has never been the way to prosperity. Can the market go a little higher? Yes, because it’s a fool’s game and it’s going to end badly. It’s just a matter of when.”
U.S. gross domestic product expanded 2.8 percent in 2010, according to the median estimate of 69 economists in a Bloomberg survey. Growth will slow to 2.6 percent in 2011 and increase to 3.2 percent in 2012, the forecasts show.
Bill Gross, Pimco’s co-chief investment officer, said in a Dec. 3 radio interview on “Bloomberg Surveillance” with Tom Keene that the “old normal” was growth of 6 percent to 7 percent and the “new normal” is roughly half that. Mohamed El-Erian, the other chief investment officer at Pimco, said in an e-mail on Dec. 1 that the forecast has a 55 percent to 60 percent chance of coming true.
“We are running at a half-size-paper-airplane type of economy as opposed to one with stable wings and full thrusting jet engines,” Gross said.
The S&P 500 gained 6.5 percent in December, sending the gauge above 1,251.70 for the first time since Sept. 12, 2008, the last trading day before Lehman Brothers Holdings Inc. filed the world’s biggest bankruptcy and prompted a 46 percent drop for the benchmark gauge through March 9, 2009.
May 6 Crash
The stock index fell 16 percent between April 23 and July 2 after credit downgrades for Greece, Portugal and Spain spurred concern that global economic growth would slow. Investors started withdrawing money from the stock market after the May 6 crash erased $862 billion of value in 20 minutes. About $90 billion has been removed from funds that buy American stocks, according to data compiled by the Washington-based Investment Company Institute.
“You had kind of a perfect storm,” Michael Nasto, senior trader at U.S. Global Investors Inc., which manages about $3 billion in San Antonio, said of the May 6 crash. “It’s a positive that since then, nothing has happened and we continue to grind higher.”
Equities started rebounding in July as better-than- estimated earnings at companies from United Parcel Service Inc. to Apple Inc. and Ford Motor Co. lifted confidence the economy is recovering. The S&P 500 has surged 20 percent since Fed Chairman Ben S. Bernanke’s Aug. 27 speech in Jackson Hole, Wyoming, where he foreshadowed the second round of quantitative easing. The central bank said in November it will buy an additional $600 billion of bonds through June, expanding on record stimulus of $1.7 trillion in asset purchases.
‘Roller Coaster Ride’
“It was quite a roller coaster ride for the equity markets,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC. “Even though the economic picture got cloudy off and on, the corporate picture continued to stay sunny and warm. Not only have corporations cleaned up their balance sheets to be in wonderful financial conditions, corporate profitability remained exceedingly healthy.”
More than 70 percent of companies exceeded analysts’ profit estimates in the third quarter. It was the sixth straight period that many beat projections, the longest stretch since at least 1993, Bloomberg data show. Balance sheets are the strongest on record, according to Goldman Sachs Group Inc.’s David Kostin, who cited data showing companies hold more than $1 trillion in cash, the most ever compared with the value of their assets.
Prediction of Rally
The benchmark gauge for American equities will rise 9.3 percent from its 2010 close to 1,374 in 2011, bringing the increase since the end of 2008 to 52 percent, the best return since 1997 to 1999, according to the average of 11 strategists in a Bloomberg News survey.
“It’s been a turnabout,” Luschini said. “With the state of the consumer seemingly not deteriorating anymore, coupled with the fact that we are in an economic recovery, the most economically sensitive or cyclical sectors should perform the best.”
S&P 500 companies reliant on discretionary spending by consumers — including movie-rental service Netflix Inc. and online travel agency Priceline.com Inc. — surged 26 percent as a group in 2010, the most among 10 industries.
Netflix, which joined the index on Dec. 17, more than tripled to $175.70 in 2010. The Los Gatos, California-based company boosted the number of users to 16.9 million in the third quarter, up 52 percent from a year earlier. Priceline, based in Norwalk, Connecticut, surged 83 percent to $399.55, bolstered by a rebound in hotel bookings and international travel.
Caterpillar, the world’s biggest maker of construction equipment, rose the most in the Dow, climbing 64 percent to $93.66 this year. The Peoria, Illinois-based company has exceeded the average analyst earnings estimate for seven straight quarters. DuPont, the chemical maker based in Wilmington, Delaware, surged 48 percent to $49.88 for the second-largest Dow average gain.
McDonald’s, based in Oak Brook, Illinois, advanced 23 percent, the most in three years, to $76.76. Sales at the world’s largest restaurant chain have risen for the past four quarters as Chief Executive Officer Jim Skinner lured customers with frappes and fruit smoothies.
As concern that the economic recovery would stall eased, the benchmark measure of using S&P 500 options to hedge losses dropped. The VIX, as the Chicago Board Options Exchange Volatility Index is known, tumbled to 17.75 from 2010’s high of 45.79 in May.
“The profitability and margins of U.S. corporations are significant,” said Stephen Wood, the New York-based chief market strategist for Russell Investments, which manages $149 billion. “Corporate earnings data is providing an increasingly positive trend, while the negatives continue to be the lingering information that is already known.”
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