The Bull Turns Two

Two years ago today, the S&P 500 closed at 676.53. That was the market’s lowest close since September 12, 1996. The Dow was in even worse shape. Adjusting for inflation, the Dow was basically unchanged over the preceding 43 years.

As low as the market was, some folks were saying that it was headed still lower. In an article from exactly two years ago today, Bloomberg noted that David Rosenberg thought the S&P 500 “may bottom out at 600 in October.”

Bloomberg quoted Nouriel Roubini as saying “it’s highly likely it goes to 600 or below.” His reasoning was that the S&P 500 would earn $50 in 2009 and investors would pay 12 times that.

Sorry, professor. As it turned out, the S&P 500 earned $56.86 in 2009 but investors were willing to pay a lot more than 12 times earnings. In fact, the index broke 1,130 just before 2009 ended which was close to 20 times earnings.

Why were investors willing to pay so much? Because earnings continued to recover. Last year, the S&P 500 earned $83.78 and Wall Street currently expects $96.19 for this year. Even now, the S&P 500 is trading at 13.65 times this year’s expected earnings which is a fairly modest valuation by historical standards.

Did the perma-bears welcome the rally? Nope; they castigated it at every turn. This has been the most hated rally in Wall Street history:

Analysts Turning Bearish on S&P 500 After 14% Rally
Morgan Stanley Says S&P 500 to Drop 25%, Cuts Outlook
S&P 500 Overvalued by 40%, Set to Fall, Smithers Says
By Most Measures, Stocks No Longer Look Cheap

But the numbers tell the truth. Since the end of February 2009, the market value of the Wilshire 5000 has increased by $6.6 trillion which is more than $20,000 per every American. The S&P 500 made its fastest double since the Great Depression and includes a 16% drop during the spring and summer of 2010.

Posted by on March 9th, 2011 at 11:32 am


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