Dow turns positive for the year as investors bet on recovery
NEW YORK -- The black-and-blue Dow blue chips are finally back in the black for the year. Will they stay there?
On March 9, the Dow Jones industrial average was in free fall, awash in a pool of red ink. Investors' imaginations mirrored the bleak performance by conjuring up scary images of the iconic stock index tumbling to zero.
Since then, the Dow — and the entire U.S. stock market — has basically shot up in a straight line. Stocks have risen at the fastest clip in the first 90 days after a bear market bottom since the Depression-era 1930s.
The Dow's 34.4% rally off its March 9 low erases the deep hole it dug for itself earlier in 2009 and puts it back in positive territory for the first time since early January. The Dow, up 23 points this year at 8799 but down 37.9% from its all-time high, is the last major U.S. stock index to turn positive for '09.
"We went from meltdown to melt-up," says Ed Yardeni, chief investment strategist at Yardeni Research.
What changed? The get-me-out-of-this-market trade that was in place all the way down — which Wall Street calls the "Depression II" or "Armageddon" trade — was abandoned as fears of a worst-case economic outcome faded. The government's ability to stabilize the economy and banking system has reduced record fear levels, setting the stage for a revival in risk taking.
Wall Street has put on a new, more optimistic trade, dubbed the "Recovery Trade." It's a bet on an economic rebound. Its success has been driven in large part by the "green shoots" concept. This term was coined by Federal Reserve Chairman Ben Bernanke to describe the early signs of a recovery that are gleaned from economic data that come in less bad than expected and point to better days ahead.
In recent weeks, a slew of less-gruesome-than-expected data have come in, fueling optimism in the green-shoots theory.
The latest readings on consumer confidence, retail sales, job losses, unemployment claims, pending home sales, car sales, personal income, construction spending and manufacturing topped expectations.
The ability of the 19 major banks to survive the government's "stress test" in May and successfully raise needed capital from private investors has also boosted confidence.
Still, stocks have recently been in stall mode, trading mainly sideways as investors determine their next move.
Where do stocks go from here? What's the next winning trade that will turn the big bounce into a sustainable bull market? What could go wrong?
The Standard & Poor's 500 index is up 40% since March 9, a megajump that can be interpreted negatively or positively.
On the bullish side, the current gain off the low is below the 55% average rise in the past five recessions, data from Navellier funds show. This underperformance suggests more upside. On the bearish side is the fact that the Dow enjoyed five rallies ranging from 23% to 48% in the period following the 1929 stock crash and through the ultimate 89.2% drop ending in 1932. This suggests that another down leg can't be ruled out, nor can a longer period in which sharp rallies are followed by swoons.
