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Heck of a Two Year Ride—Will Get Tougher

The two year anniversary of the bottom. It has been a heck of a ride ... but it will likely get tougher.

Unfortunately, a lot of people have only come late to the party ... but still. Take a look.

Since the bottom :(March 9, 2009)

  • S&P up 95%
  • NASDAQ: up 86%
  • Russell 2000: up 120%
  • CRB Commodity Index: up 74%
  • Dollar Index: down 14%
  • Oil Index: up 121%

This has been a great rally even by the standards of bull markets—in fact, it is the second greatest two-year advance in the last 60 years.

S&P's Biggest 2-Year Rallies Since 1950:

  • 1. September 1953-1955 up 98%
  • 2. March 2009-2011 up 94%
  • 3. November 1953-1955 up 89%
  • 4. July 1996-1998 up 88%

What happens to stocks in Year 3 of a bull market? Unfortunately, it gets tougher. Sam Stovall, Chief Investment Strategist at Standard & Poor's, noted that "The magnitude of the market's advances lessened."

That makes some sense—just think about it ... most of the time, these advances have been accompanied by notable advances in earnings growth ... that is what is happening with this rally. But as you get big earnings advances, they eventually run up against resistance...which is exactly what is happening this year.

S&P 500 earnings growth:

  • 2009: 50%
  • 2010: 30%
  • 2011: 15%

Source: S&P

The point is: at some time it is going to get harder to push earnings higher, particularly as we have moved toward a more "normal" P/E ratio for the S&P 500. Bulls are arguing that we can continue to expand the multiple, because companies are so lean and mean that as we advance the economy and improve topline even more, more of the profits will go to the bottom line.

Maybe. But that conveniently ignores higher costs--not just for commodities but also for hiring. It's not that stocks can't advance ... they likely will ... but you are kidding yourself if you think we are going to see the kind of advances we have seen in the last two years.

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