By Michael Baron Original is here
NEW YORK (TheStreet) — The U.S. stock market’s climb this year back above its 2008 pre-financial crisis levels boils down to a simple equation: quantitative easing trumps unemployment.
Or in not quite linear apples-to-oranges mathematical terms, $600 billion is greater than 15.1 million.
The $600 billion figure represents the amount the Federal Reserve is pumping into the system via “QE2” — its ongoing second stimulus program to purchase long-term Treasury securities at a rate of around $75 billion per month through the second quarter of 2011.
While the market dipped initially after the details of “QE2” were announced on Nov. 3, the march of stocks off their July 1 lows of the year was mostly fueled by the expectation that the Fed would step in and do something if lackluster economic data continued to pile up.
Which brings us to 15.1 million, a number derived from the most pesky piece of lackluster economic data around, the unemployment rate, which edged up to 9.8% in November after spending three straight months at 9.6%.
The 9.8% level translates to a little more than 15 million Americans out of work. That’s roughly where it was at the start of 2010, making a strong case that the optimism that’s driven stocks higher this year has more to do with faith in the Fed’s willingness to reopen the spigot than it does meaningful improvement in economic conditions.
All told, the Dow Jones Industrial Average rose 11% in 2010. The S&P 500 jumped 13%, and the Nasdaq Composite was the best performer of the group, advancing 17%. It was the second straight year of gains for equities, and the Dow is now up in four of the last five years.
December was the difference maker as the indices posted gains 5.2%, 6.6%, and 6.2%, respectively, this month. September, historically a weak stretch for equities, was key as well as stocks turned in their best performance in that month in more than 70 years. The S&P 500 alone surged almost 9%.
2010 got off to a choppy start compared with 2009, a year of spectacular gains that featured equally spectacular volatility. The Dow finished up around 20% but rallied more than 60% off its March 2009 lows of below 6,500, while the Nasdaq closed the year up more than 40%.
So maybe it wasn’t surprising that the January Effect didn’t last the month. In mid-February, the Dow spent nearly two weeks below 10,000 before beginning to rally in earnest as traders started to price in expectations of strong earnings and economic improvements. Apple(AAPL_), which ended the year up more than 50%, launched U.S. sales of the iPad on April 3, and the future looked bright.