The S&P 500 is up nearly 8% on the year amid a stream of better-than-expected economic news, progress over the Greek debt drama and a fourth-quarter earnings season that was not nearly as bad as feared. Yet jitters remain that 2012 is shaping up to look a lot like 2011, when the market soared into late April only to end the year essentially flat.
Certainly the echoes of 2011 are there. About this time last year, the economy appeared to be picking up steam, only to be undone by a series of shocks, including the Arab Spring, the earthquake and tsunami in Japan, and the eurozone debt crisis.
Cut to 2012, and tension with Iran has oil prices back above $105 a barrel in New York trading, the European Union is sputtering into recession and domestic economic growth remains subdued.
All it takes is one big shock, the thinking goes, for stocks to make 2012 look like déjà vu all over again.
But let’s not write the epitaph on the year for equities just yet — there are key differences between this year and last.
For one thing, market internals — and volatility — look nothing like what they were in 2011, one of the most turbulent years in history.
“The S&P 500 has now gone 35 trading sessions in 2012 without suffering a 1% down day,” notes Jeffrey Saut, chief investment strategist at Raymond James Financial (NYSE:RJF). That suggests more good trading to come.
“There have been only 12 other years since 1928 where the market has traded higher for 30 sessions or more, without a 1% down day,” Saut says. “In all but one of those occurrences the S&P 500 was higher at year’s end with a median gain of more than 15%. That’s yet another positive harbinger for the rest of this year.”
Furthermore, despite the weakest earnings season in years, valuations remain cheap and attractive. Peak margins might have slowed corporate earnings growth, but bottom lines still are rising faster than share prices, making stocks look like a bargain.
Indeed, stocks are 16% cheaper than they were a year ago. The trailing price-to-earnings ratio of the S&P 500 currently stands at 15.2, according to data from Birinyi Associates. A year ago, the market’s trailing P/E was 18.6.
And although future profit growth might be slowing, the market is lagging even more. Earnings have beaten Wall Street estimates for 12 straight quarters. Meanwhile, analysts forecast S&P 500 earnings to hit a record $104.27 per share this year, according to data from Bloomberg. If that outlook is on the mark, earnings will have grown nearly 70% since 2009 vs. just a 22% rise in the S&P 500 over the same period.
No wonder the forward P/E on the S&P 500 stands at just 13.1 — essentially the same level it plumbed during the depths of the bear market. Is the future really as bleak and uncertain now as it was in March 2009?
Click to Enlarge Finally, and perhaps most important, there is the four-week moving average of initial jobless claims, which has correlated closely with stock-market performance. Have a look at the accompanying chart, courtesy of the St. Louis Fed, and you’ll see that at this time last year, weekly claims were averaging 420,000 a week. They went on to peak at more than 440,000 in late April and early May — and so did the stock market. As the employment picture has improved, so has the stock market.
Yes, one big shock could easily derail the rally — but then you can say that at any time. Market internals, record corporate profits, compelling valuations and — most important — the jobs picture make it way too soon to write off 2012.