Stocks could rebound from Lehman storm sooner than expected

NEW YORK -- The financial world as we know it is said to have changed forever when Wall Street titan Lehman Bros. collapsed in September 2008.

Still, despite repeated calls by skeptics for a pullback in response to the big rally since early March — that has pushed stocks up to levels not seen since Barack Obama was elected Nov. 4 — some market pros say stocks have a good shot at getting back to levels they were trading at before the Lehman storm a lot sooner than expected.

Ed Yardeni of Yardeni Research says the Standard & Poor's 500 index, which fell off a cliff after Lehman's demise, could retrace its lost ground in six to 12 months. The S&P, though 46% above its March low, is still 21% below where it closed before news of Lehman's collapse broke.

Jim Paulsen, chief strategist at Wells Capital Management, notes that the market, despite the rally since March, has traded sideways since Lehman's failure and that those 10 months of repair could be the start of a new bull market. "What's changed is enough data has come out to confirm that we are not headed for Depression 2.0," he says. "While the Depression trade has been taken out, what investors have not put back in this market is any sense of economic recovery."

Lehman's failure set in motion a chain of events that ignited an economic storm, left the global financial system on the brink of collapse and sparked the worst stock meltdown since the Great Depression. The bank's Sept. 15 bankruptcy filing marks a line of demarcation between the old, high-risk way of doing business on Wall Street and the so-called new normal, characterized by less risk-taking.

Historians might one day refer to this dark period in Wall Street history as B.L. and A.L., as in Before Lehman and After Lehman. Signs of economic improvement are being measured by comparing current conditions with pre-Lehman conditions.

On that score, progress is being made. A key U.S. manufacturing index, stock fear gauge and long-term government bond yields have rebounded to pre-Lehman bankruptcy levels. Another sign of stability is less fear in credit markets, such as a sharp tightening in the spread between a key interest rate that London banks charge other banks and a yield on a low-risk three-month U.S. Treasury bill. Still lagging: consumer confidence and employment.