NEW YORK — 2011 was shaping up to be a washout for the stock market just two weeks ago. Now, it’s within shouting distance of its biggest comeback in nearly three decades.
The Standard and Poor’s 500 index has jumped 11.4 percent since hitting its lowest level of the year Oct. 3, largely because investors have become more confident that Europe will shelter its banks from huge losses on Greek bonds should that country’s government stop making payments on its debt.
For much of the summer, investors feared a Greek default could lead to a lending freeze among European banks and cascade into a credit crisis similar to the one in 2008.
The S&P 500 was down 12.6 percent for the year as of Oct. 3, when it closed at 1,099. As of Friday, it had trimmed the loss to 2.6 percent. It needs to gain 33 points, 2.8 percent, to get above 1,257, where it started the year.
If the S&P 500 finishes the year with a gain, it will be the biggest turnaround since 1984. That was the last time the S&P 500 fell more than 10 percent in a calendar year and finished the year in the black.
Eking out another gain of that size in 2011 wouldn’t make anyone rich. But consider the hand that investors were dealt this year: A tsunami and nuclear disaster in Japan plunged the world’s third-largest economy into a recession and created a worldwide parts shortage. Uprisings throughout the Arab world sent the price of gasoline skyrocketing to an average of $3.98 a gallon in May. The U.S. lost its top-notch credit ranking for the first time. And Europe has teetered on the edge of a financial crisis that could hobble the region’s banking system.
With all of that going on, investors might wonder how the S&P 500 index could possibly end the year higher than where it started. The biggest reason: Some think stocks may be the best value out there.
With dividend payments alone, the S&P index offers a return on par with low-risk U.S. Treasurys. From Aug. 24 through Thursday, the yield on the 10-year Treasury note was below the dividend yield of the S&P 500 index. Since 1962, the only other time that has happened was during the 2008 credit crisis, according to J.P. Morgan.
“You have to have pretty dark thoughts to think that there’s not a chance that the S&P 500 beats out Treasurys at this point,” said Bill Stone, chief investment strategist at PNC Bank.
Stone thinks company earnings are going to be better in the third quarter than many analysts expect, driving stock prices higher. Since July, analysts have cut back their estimates for the S&P 500’s third-quarter earnings 3 percent because of concerns that the U.S. economy might be heading into a recession. Since then, retail sales, applications for unemployment benefits, and the number of jobs added in August have been better than Wall Street expected.
“The market has been priced for the worst, but that’s not bearing out in reality,” Stone said.
Others point to the fact that the S&P 500 was stuck in a narrow trading range since Aug. 4. The S&P 500 has traded mainly between 1,099 and 1,218, a relatively small band. On Friday, it broke out of that range, closing at 1,224.
“If we have truly averted the worst of Europe, then a large dark cloud is going to be lifted off of this market and momentum is going to take over,” said Richard Ross, global technical analyst at Auerbach Grayson.
“I’m skeptical of this rally,” said Sam Stovall, chief equity analyst at Standard & Poor’s. “But even if there is a gain, history says that you’re not going to end up with anything to be too excited about.”
