A year-end stock comeback? It’s happened

Associated Press

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 on 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 that a Greek default could lead to a freeze of lending between 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 just 33 points, or 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 year, Apple Inc. introduced the Macintosh, and President Ronald Reagan’s campaign ads proclaimed that it was “Morning Again in America.” It was also the last time that the S&P 500 fell more than 10 percent during a calendar year and finished the year in the black. The index finished that year up 1.4 percent.

Edging 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 gas 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’s happened was during the 2008 credit crisis, according to J.P. Morgan.