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The bull market turns 2, but can it make it to 3?

Two years after stocks hit bottom, their next move may hinge on the economy's ability to cope with higher oil prices.

March 08, 2011|By Tom Petruno and Walter Hamilton, Los Angeles Times
  • The global economys revival has lifted the Standard & Poor's 500 index of big-name stocks 95% over the last two years, boosting the market value of the shares to $12.06 trillion.
The global economys revival has lifted the Standard & Poor's… (Andrew Gombert, European…)

Hold the champagne. For the second anniversary of the bull market in stocks, a barrel of crude might be a better gift.

As Wall Street marks two straight years of share price gains, investors who expect more to come are betting that oil's latest surge is just another minor obstacle — like so many others that have failed to halt the rally for long.

Since stocks bottomed on March 9, 2009, in the aftermath of the financial-system crash, the average New York Stock Exchange issue has nearly doubled in price. By some measures, the speed of the rebound has been faster than any market run-up since the 1930s, defying doubters who have repeatedly predicted imminent collapse.

The global economy's revival has lifted the Standard & Poor's 500 index of big-name stocks 95% over the last two years, boosting the market value of the S&P 500 shares to $12.06 trillion now from $5.9 trillion at the 2009 low.

That has done a lot of repair work on ravaged 401(k) retirement accounts, at least for investors who've been willing to stay aboard.

The market Tuesday showed more of the resilience that has defined the rally since the dark days of 2009. The Dow Jones industrial average rose 124.35 points, or 1%, to 12,214.38 as oil prices pulled back modestly from the 21/2-year high reached Monday.

Crude slipped 42 cents to $105.02 a barrel in New York after Kuwaiti officials said OPEC was discussing whether to hold an emergency meeting on production, as Libyan oil output remains sharply curtailed by the revolt there.

Although stocks have struggled as oil has soared 22% since mid-February amid escalating unrest in the Middle East and North Africa, the Dow is down just 1.4% from its 32-month high of 12,391.25 reached Feb. 18.

The market's continuing strength has encouraged investors such as Ray Uhler, a 72-year-old Rancho Santa Margarita retiree. He said he has seen his portfolio bounce back sharply over the last two years, in part because he picked up bargains at the market's lows.

Uhler said he bought Ford Motor Co. shares at $2 after the stock plummeted during the recession. Ford shares closed Tuesday at $14.47.

"I haven't dumped our stocks and gotten out of the market and gotten into cash or bonds," Uhler said. "I look upon a market decline as a buying opportunity." He said he expected the economy to continue to improve, driving stocks higher.

To many Wall Street bears, however, rocketing oil prices look like the blow they've been expecting to finish off the bull market.

If crude stays elevated — lifting gasoline prices that already are topping $4 a gallon in California — it could put a painful squeeze on U.S. consumer spending, which still accounts for 70% of the economy.

"The consumer is the Achilles' heel," said Doug Kass, who heads money manager Seabreeze Partners in Palm Beach, Fla.

With stocks, he said, "it seems to me we're far closer to the end of the move."

But he also acknowledges that the market has left the bears in the dust over the last two years since the Dow bottomed at 6,547.05.

Where the pessimists were wrong, Kass said, was in underestimating the powerful rebound in corporate earnings since the recession.

After slashing their expenses via brutal layoffs and other cost-cutting as the economy tanked, many companies quickly benefited as sales began to turn up with the recession's end in mid-2009.

Also, banks and other financial companies have posted some of the biggest turnarounds in earnings since 2008, helped by government capital injections and the Federal Reserve's near-zero short-term interest rates.

Financial stocks in the S&P 500 have shown the biggest advance among the 10 major index sectors over the last two years, rallying 169% on average. But they also were the biggest losers in the last bear market.

Overall, operating earnings of the S&P 500 companies soared 47% in 2010 from 2009, providing a solid underpinning for the bull market.

"Costs are down and profits are up, and profits are what move the markets," said Marc Pado, U.S. market strategist at brokerage Cantor Fitzgerald.

This year, analysts at Standard & Poor's expect the S&P 500 companies' operating earnings to rise 15%, a gain that Pado believes will push stocks higher.

The bulls also believe that equities remain reasonably valued relative to earnings. The S&P 500 index's price-to-earnings ratio is 13.7 based on estimated 2011 earnings.

But that assumes that the estimates are on target. If the economy weakens, profit forecasts could come down in a hurry.

Kass sees the economic recovery so far as a story of "the schism between the haves — large corporations — and the have-nots, the middle class."

Yet those same big companies, he noted, are dependent to a large degree on U.S. consumer spending, which is threatened by mushrooming energy costs.

Market bears also point to another major risk to the economic recovery: the end of fiscal and monetary stimulus programs.

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