Putting the rally in perspective

The S&P 500 index is up 34% from its March 9th low. The great debate now is whether this is a bear market rally or the start of a new bull market. Another couple of days like today (+3.4%) and the market will have broken above its 200-day moving average. I'm not a technician, so I won't press the point, but to me this has all the signs of being the real thing. The rally has been driven by a steady stream of better-than-expected news. Commodities are up, global shipping rates and volumes are up, manufacturing surveys show improvement, consumer spending has bounced, credit spreads have narrowed, unemployment claims have stopped rising, volatility has declined, the banking system is surviving, some companies are reporting strong profits, housing prices seem to be bottoming, and home builders' stocks are up almost 90% from their lows despite the fact that residential construction in March fell to an all-time low of 2.7% of GDP, to name just a few of the positive surprises.

I've been optimistic all along, despite the overwhelming bearish sentiment, trusting in the inherent dynamism of the U.S. economy. The economy has emerged from the biggest financial crisis since the Depression in pretty good shape, considering how bad things were (and how bad the market thought they were going to be), and with little or no help from bailouts, TARP or stimulus spending. Indeed, government help to date has probably served mainly to retard the recovery, since it was badly handled from the start and has added tremendously to general confusion and risk. The Fed's massive quantitative easing was a big help (though it should have come sooner), and unwinding it could generate unpleasant inflationary pressures in the future, but in retrospect I think they did the right thing. Too bad almost all of the $800 stimulus bill is still on track to be spent—we would have been spared a lot of grief and higher taxes if it had never passed.

When Obama eventually claims victory for himself and his policies, you can point him to this blog, where there is plenty of evidence that the economy was fixing itself long before he took office. Indeed, as I've said before, I think the economy was getting ready to turn up by the end of last year, but confidence was shattered in January and February when Obama stunned the world by pushing through a massive expansion of government, trillion-dollar deficits and huge future tax increases.

All of that bad news is still ahead of us, unfortunately, but for now the most important thing is that the economy is not collapsing, and is probably in or very close to being in recovery mode. The debate now shifts to how strong and enduring the next business cycle will be.