Stock Market: March Rally Soothes Investors

March—in like a lion, out like a lamb—as the almanac reminds us. This folksy forecast proved right on for the nation’s financial markets this March—its applicability to our weather was a different matter. In the last three weeks of March, stocks gained more than 20 percent from their lows. Experts warn us not to jump to conclusions. This good news is reason to celebrate, but it’s premature to assume that a recovery is in full swing. Time has yet to tell.

What is behind the market recovery? Experts point to various factors. Many note that the stock market often shows signs of a rebound first—before the economic data spells it out. At the beginning of March, stocks had reached almost record-breaking lows –at the lowest point they were 56.8 percent off from the highs logged in October 2007-and maybe it was just high time they rallied. The economy was—and continues to be— facing tough challenges, but the beating the market has taken was excessive. We may be seeing a correction that might provide the foundation for a recovery. Stock prices aside, the economic news is brighter and the downward economic spiral seems to be decelerating. Times are still tough, but signs of economic renewal are there.

Key factors inclulde:

• Signs of better days ahead for the housing market. Existing home sales increased by an unexpected 5.1 percent from January. This may be attributed to the drop in prices—down 15.5 percent from a year ago—but nevertheless it generates some optimism. New home sales rose, too, showing a 4.7 percent rebound from the lowest level recorded in January.
• Consumer spending rose in February for the second month in a row, and orders for durable goods were up (3.4 percent for the month) for the first time in seven months.
• Details of Treasury Secretary Geithner’s finalized plan to assist ailing banks were made public on March 23. The strategy and steps outlined in the plan reassured would-be critics that Geithner was not proposing any type of “nationalization”. A degree of optimism generated by the new plan buoyed the market as investment experts took in the key aspects of the rescue effort.

Of course there remain some major challenges, and recent data also indicated:

• The Gross Domestic Product (GDP)—a broad indicator of economic health—was updated for the fourth quarter of 2008 to show an annualized -6.3 percent. This number represents the worst drop in GDP since the first quarter of 1982. The unexpected severity of this decline, as 2008 drew to a close, is offset by the positive numbers generated in February by consumer spending and the housing sector. Perhaps the worst is behind us.
• Concerns over the job market remain. Wage income decreased for the fourth month in a row and job losses continued to mount.

It is unrealistic to predict the start-up to a bull market so soon, but for many who have looked for signs that the worst is over, there are some reasons for optimism.

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