Economic Optimism

Word got around that the economy was showing the signs of revival. The optimism of the experts has quickly been reflected in the buying patterns of investors and the economy is beaming. Yesterday, the Dow Jones industrial average was at a 235 point high, the biggest daily point gain in over a month. This single handedly makes up for three-quarters of last week’s economic plateau and the losses that followed.

An incredible profit report from Lowe’s Company showed increased homebuilder sentiment and positive expert feedback throughout the last few weeks revived investors’ confidence in the impending economic rebound. Stocks began to fall sharply last week as worries that the stocks were rising too fast, reflected by a still low housing market, interrupted the market rally slightly last week, creating a self-fulfilled plateau that we seem to be exiting as buyer confidence is restored.

Analysts believe that stability in the housing market is important to restoring the economy, which will only happen when loan availability is restored and housing prices can go up due to higher demand. “There’s a realization that things are going to get better,” said James Cox, a managing partner at Harris Financial Group. “That’s the main theme of the market over the last couple weeks.”

Despite the recent rallies and yesterday’s upswing, the market is expected to remain volatile as more cautious investors see a rising tide in the economy and confidence is restored. They want to see signs that the economy is actually recovering and not just slowing another descent. So far, the rallies in the economy since March have shown enough signs of stabilization to attract some investors. According to Linda Duessel, equity market strategist at Federated Investors, the rally was driven by “less bad” information. “Probably we’ll get bored with that as the months progress,” she said. “We’ll need something better to move the market.”

There was an adequate boost yesterday as Lowe’s, one of the United States leaders in home improvement products, posted an 8.1% gain. Buying accelerated later as the National Association of Home Builders reflected that gain by reporting that May is beginning to reflect the second consecutive high month in the housing market index.

Banks are also doing well in the market right now. Bank of America posted a 9.9% gain. State Street rose 8.5%. Analysts say the ability for banks to raise money, especially by using the rallies in the stock market, is a sign of strength, albeit late, even if added shares make those already in circulation worth a bit less. Sometimes, apparently, less is more.

James Cox believes the banks are stable. “We’re not going to see any of the large banks go down. And now that we have stabilization in the banking system, we can move forward,” he said. Nine stocks rose for every single one that fell in Wall Street yesterday, a very confident boost. The dollar fell against all major currencies and gold prices also fell. As horrible as that sounds, the dollar has been significantly higher than normal, and gold prices have been the highest ever due to the desire of investors to find something a little more stable. It is very normal for gold prices to go up when the market is going down. They are not conversely related, but they do tend to have opposite trends.

Overseas stocks were mixed, mostly following weak corporate quarterly earnings in Asia. Japan tended to fall an average of 2.4%, Britain jumped 2.3%, and Germany and France both rose 2.4%. This seems to show more confidence in services and finances over technology and products.

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