2010 Stock Market: 'QE2' Trumps Lack of Jobs

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 joblessness.
By Michael Baron ,

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) - Get Report

, which ended the year up more than 50%,

launched U.S. sales of the iPad on April 3

, and the future looked bright.

The buying reached its crescendo in mid-April. A bullish outlook from

Wells Fargo

(WFC) - Get Report

earlier in the month had investors primed for blowout numbers from the rest of the big banks that failed to materialize when first-quarter earnings reports came in. The financials historically provide leadership in bull markets, but with uncertainty about future capital requirements, the continued winding-down of bad mortgage assets, intermittent fears of a meltdown in commercial real estate and the growing drumbeat for "meaningful" reform of the industry, the banks were hamstrung.

The big regulatory blow came on April 16 when the

Securities and Exchange Commission

announced its fraud charges against

Goldman Sachs

(GS) - Get Report

. The financials swooned, and the broader market stalled. Less than a month later, sovereign debt woes -- mainly Greece at that point -- pushed their way on stage, and on May 6,

investor skittishness and technology conspired

to usher the phrase "flash crash" into the collective consciousness as the Dow plunged nearly 1,000 points in less than 10 minutes.

The blue-chip index recovered to close down less than 400 points, but the market limped along for nearly two months, bottoming out on July 1, at the end of the second quarter. Trading reverted to choppy through the summer. Earnings came in better than expected for the most part, but the economic data still wouldn't cooperate, and the sovereign debt situation in Europe remained fluid (as it does now to some extent.)

Then came a stellar September as the belief that the Fed would come to the rescue took hold. Other positives as the year wound down included a pick-up in M&A, especially in tech, where

Hewlett-Packard

(HPQ) - Get Report

and

Dell

(DELL) - Get Report

battled it out for

3Par

. Private equity also started to put some of its considerable dry powder to work.

Dividend increases and buybacks also cropped up with increasing frequency --

General Electric

(GE) - Get Report

has lifted its annual payout twice in 2010 -- and the IPO market livened up (Welcome back,

General Motors

!

(GM) - Get Report

).

The Fed's announcement of "QE2" in early November along with a powerful third-quarter earnings season was then enough to push equities back above those pre-crisis levels of more than two years ago. According to the most recent

Thomson Reuters

data, 72% of the companies in the S&P 500 topped Wall Street's consensus view in the September-ended quarter. Current consensus estimates are calling for earnings growth of 32% from the S&P 500 in the just-ended fourth quarter, but there's trepidation about the new year with Wall Street projecting earnings growth of just 12.2% for the first quarter that starts next week.

What the U.S. needs is for some of its healthy profitable companies that are boosting their dividends and snapping up competitors to start hiring at home. For stocks to do well in 2011, that 15.1 million unemployed Americans figure cited at the start of this article needs to start heading down before the Fed's $600 billion dries up.

--

Written by Michael Baron in New York.

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Michael Baron

.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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