Markets again bet the worst is past

Did they cancel Great Depression II? So soon?

That's one message investors might choose to take away from the sharp rebound in stock markets worldwide over the last three weeks.

The Standard & Poor's 500 stock index has pared its year-to-date loss from a stunning 25% as of March 9 to just under 10% at Friday's close.

The global economy still is in miserable shape after the dive in consumer and business spending since mid-2008. Banks still totter, unemployment keeps rising and corporate earnings are cratering.

But for the moment, Wall Street has stopped anticipating the end of the world, and is figuring we're just in a very bad recession -- and one that depressed share prices may already largely reflect.

Edward Yardeni, an economist and consultant who heads Yardeni Research in Great Neck, N.Y., senses a change of mind-set among many of his institutional investor clients. "I see more of them wondering if they should become less defensive" in their portfolios, he says.

That's the natural reaction to abrupt market rallies, of course. Even the most confident bears begin to doubt themselves when share prices rise. They wonder, "What does the market know that I don't?"

Maybe nothing. This is the fifth time U.S. blue-chip stocks have risen more than 10% since the long slide began in October 2007. The previous four rallies all gave way to more selling and new market lows.

This one hit an air pocket on Friday, when sellers shaved 2% off the S&P 500 index. Still, the S&P was up 6.2% for the week, thanks to the warm reception investors gave the Obama administration's latest financial-system rescue program Monday.

That's right -- Treasury Secretary Timothy F. Geithner came up with an idea that wasn't immediately trashed by Wall Street. He provided details of his long-awaited plan for private investors to partner with Treasury to bid for some of the rotten mortgage assets on banks' balance sheets.

Geithner can't guarantee that the program will have the desired effect of bolstering banks' health. Private investors may simply not offer high enough prices to make it worth banks' while to jettison troubled assets. It may take months to know if it will work.

The stock market's rally on the news could merely have reflected relief that, finally, all of the components of the government's rescue plan now are on the table. That list includes the alphabet soup of lending programs created by the Federal Reserve as it pumps trillions of dollars into the financial system to stem the credit crunch.