Curious Capitalist

Will the Stock Market Rally Last?

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Sad traders no more (Mike Segar/REUTERS)

Unemployment is still high and salaries are compressed, but one thing that’s rising like nobody’s business is stocks. The S&P 500 recently grew 100% from the level that it fell to during the low point of the financial crisis back in March 2009 – the fastest such doubling in the index’s history. This recent run up ┬árepresents the 12th longest bull market since the Great Crash of 1929. And there is a case to be made that shares won’t stop rising anytime soon. Here’s why:

The stellar stock performance of America’s largest companies is down to global growth – while the U.S. and Europe plunged into recession post crisis, much of the rest of the world surged ahead, and big U.S. companies do lots of their business in these developing markets. Technology driven productivity has helped, too. Companies are spending on software to do jobs more efficiently, but not on much else, like labor. The result has been that recently earnings for companies in the S&P 500 have been exceedingly strong. On average, profits were up more than 30% in the forth quarter from a year ago. Yes, share prices have risen faster, but that was because they were coming from depressed lows. Even after the run-up in share prices, the average company in the S&P 500 now has a price-to-earnings ratio of 14 based on this year’s operating profits. That’s lower than the average since 1935 of 16, and far lower than the 27 stocks were trading at in early 2000 at the height of the technology stock bubble.

Will this bull market last a while longer? The answer is probably yes. More than anything else the stock market trades on surprises. And all of a sudden the economy seems to be recovering much faster than the extremely low bar we had lowered our expectations to. Unless, of course, if inflation starts to bite or emerging markets tank, which in today’s growing bull market would be the surprises we need to watch out for. If that happens, the bears may once again have their day.