Rallying stocks hint at economic rebound
NEW YORK -- The 8-week-old stock market rally represents the latest "green shoot," or sign of life, signaling a hint of hope for an economic recovery.
Following in the footsteps of a slew of data that suggest economic conditions are getting "less bad," such as first-time jobless claims, consumer confidence, home prices, corporate profits and economic growth, stocks are coming off their first back-to-back monthly gains in a year. The combination of rising stock prices and rebounding 401(k) balances is the latest ray of hope pointing to a rebound, says Jim Paulsen, chief investment strategist at Wells Capital Management.
A stable and improving stock market is seen as a key ingredient to paving the recovery on Main Street. Rising stock prices and the resulting wealth effect, or feeling of being richer, could boost confidence and give consumers the courage to spend more freely, a behavioral about-face that could provide a needed jump-start to the ailing economy.
"There is a positive-feedback loop developing between Wall Street and Main Street, and that is the exit ramp for this crisis," Paulsen says.
Since slumping to more-than-12-year lows in early March amid the worst recession in decades, the Standard & Poor's 500 index has rallied 29%, which equates to a bull market, typically defined as a rise of 20% or more from a low.
Its 9.4% April gain was its best monthly rise in nine years, S&P says. Its 18.7% gain the past two months is the best in 34 years.
Historically, the stock market has served as a "leading indicator," so the fact stocks are rising ahead of concrete signs of a recovery isn't uncommon, says Bill Stone, chief investment strategist at PNC Wealth Management. "The market seems to sniff out early signs of a recovery," he says, adding that stocks historically hit bottom five to six months prior to an economic trough.
Still, for every believer in the green-shoot theory, there are doubters armed with a list of caveats.
Michael Farr, of money manager Farr Miller & Washington, says investors may be buying stocks too aggressively based on hopes of a recovery that may be choppier and weaker than they think.
