Good news for the economy, it seems, is good news for stocks again.
report, released Tuesday morning, showed that sentiment
rebounded smartly in March after five consecutive months of declines. And investors reacted by buying stocks.
The major indices moved sluggishly at the open, but immediately shot higher after the data were released. The
Dow added to these gains as the day progressed and the
Nasdaq held on to its early winnings.
Just a few weeks ago, stronger than expected data such as today's would have sparked a selloff. Wall Street was screaming for more interest rate cuts and data showing improvements in the economy sparked concerns the
Federal Reserve would be too conservative about cutting rates.
In fact, there was a good deal of disappointment just two weeks ago when the
University of Michigan's Consumer Sentiment Index
showed an unexpected rebound -- those numbers helped provoke a pretty big drop in stock prices.
Not So Dumb After All?
Maybe investors decided the strong consumer confidence report was good news because it was
strong -- there was no mistaking the rise as a blip. But more likely, it put investors in a buying mood because it suggests that, maybe,
Alan Greenspan might actually know what he is doing. Mr. G has asserted in several speeches that the consumer is not the real problem for the slowing U.S. economy -- weakness in manufacturing is tripping everything up.
Just last week, much of the market doubted him -- Wall Street was abuzz with talk the Fed was behind the curve on interest rates. Instead of the 75 basis-point rate cut the market wanted, the Fed lowered rates by
50 basis points when it met on March 15, and investors
sold stocks like mad after that decision was announced. By last Thursday, the
Dow was flirting with bear market territory.
"The market is finally easing off some of its dependence on interest rate cuts, for the near term at least," said Arthur Hogan, chief market analyst for
. "These consumer confidence numbers tell us the Fed was right about not making a move between meetings," he added. "And that the Fed probably knows more about the economy than we do."
If the Fed is right, the market doesn't have to worry as much about the pace at which it cuts interest rates. That means investors can celebrate good data again.
Happy, Happy; Joy, Joy
Consumer confidence rose in March despite the almost continual drubbing of the stock market and a ton of new layoffs at high-profile companies. According to the Conference Board, consumers were encouraged by "improvement in the economic outlook for the next six months," as well as by "better employment prospects."
While stock losses are important, the housing market is still robust, which may be even more crucial to consumer confidence, explained Wayne Ayers, chief economist at
. And while the number of layoff announcements is unsettling, the labor market remains quite strong. The unemployment rate inched up to 4.2% in February from 4% in December, but it remains very low. Most of the new jobless claims are concentrated in the Midwest, indicating that the layoffs are concentrated in the manufacturing sector.
President George W. Bush's
tax-cut plan should be approved soon, while, since January, a "mini-boom" in loan refinancings has helped add to consumers' purchasing power.
The consumer confidence numbers are good news for corporate earnings and for the stock market. A more confident consumer is more willing to spend money on all kinds of things -- housewares, computers, cars and stocks -- and that means demand goes up. Weak demand has been a primary concern cited by ailing companies, most of which have sharply ratcheted down their earnings forecasts over the past two quarters.
But greater confidence in the Fed's handle on the economy may be even more important for stocks. It addresses concerns that the Fed raised rates too aggressively in the first place. And it soothes irrational fears about an unraveling of the economy.