This shock-and-awe campaign impresses Jim McDonald, chief investment strategist at Chicago-based Northern Trust, which manages $560 billion for clients.
"We think that what the Fed and the Treasury have done has reduced the risk of the worst happening" to the financial system and the economy, McDonald said. Enough so, he said, that he shifted a chunk of Northern Trust's portfolio out of cash and into stocks and other investments this month, trimming his cash holdings to 11% of assets from 16%.
Also still mostly in the pipeline are the effects of the nearly $800-billion economic stimulus bill Congress approved in February. Ditto for this year's mortgage refinancing wave, with home loan rates at record lows.
At a minimum, if the financial and economic meltdowns have been arrested it makes sense that investors would have to think twice about sending stocks down further, after taking the S&P 500 and the Dow industrials to 12-year lows March 9.
Once a market bounce begins it can fuel buying by bearish "short sellers" who had borrowed stock and sold it, betting on lower prices. As they rush to buy shares to close out their trades they feed the rebound.
Short-covering helped drive the previous four rallies. But the effect wasn't long-lived.
The difference this time, however, is that even the short sellers have to wonder if they're overestimating how much more damage the economy and the stock market are likely to sustain.
Reports this week showed that sales of both new and existing homes rose in February, albeit from deeply depressed levels in January. Likewise, orders for big-ticket manufactured goods were up last month, the first increase since July. On Friday the government reported that consumer spending inched up in February, the second consecutive gain.
Of 12 economic reports this week, just three were weaker than analysts' consensus forecasts, according to market research firm Bespoke Investment Group. "While none of these reports can be classified as 'good,' the fact that they are beating expectations is a positive sign," the firm noted in a summary.
The data embolden optimists who believe that the economy shrank in the first quarter at a significantly slower pace than the 6.3% annualized rate of the fourth quarter. The consensus among economists calls for a decline this quarter of 5.2%, according to a Bloomberg News survey.
