When you open your quarterly financial statements in the next few weeks, you might be both pleased and puzzled.
Despite the economic doldrums, the stock market put together a sizzling 11 percent return over the past three months, including its best September since 1939. For a time Thursday, the Dow Jones industrial average appeared headed for 11,000.
But the gains are deceptive, market analysts say. While news about the economy has improved, there’s no reason to believe it’s roaring back. And the big advance was driven by a relatively small number of traders playing with a lot of money.
“I think a lot of this is just misguided optimism,” said Rob Arnott, chairman of Research Affiliates, an investment firm in Newport Beach, Calif. “The headwinds we face are pretty daunting.”
In other words, few are calling it the beginning of the next bull market — not with unemployment still near 10 percent and stocks bound in what market technicians call a trading range.
Still, the gains were impressive. In September, the Standard & Poor’s 500 index rose 9 percent, the Dow almost 8 percent and the Nasdaq composite index 12 percent. Every sector of the market was up.
September is usually the market’s worst month. This time, it was the third-best month of any kind in 10 years, narrowly trailing only March 2003 and April 2009, when stocks were bouncing back from meltdowns.
So why the rally? Economic news, while not great, was at least enough to dispel fears of a so-called double- dip recession. The Federal Reserve indicated it was closer to taking new action to help the economic recovery along.
And investors started looking past the November midterm elections and concluding that likely Republican pickups in Congress mean that tax increases are less likely.
The quarter got off to an inauspicious start. On the first day of July, stocks dipped to what remains their low point of 2010: 1,011 for the S&P 500 and 9,596 for the Dow in intraday trading.
After rebounding to finish July up 7 percent, the market limped through August. The S&P 500 fell nearly 5 percent, and the major indexes wiped out any gains for the year. Besides the tough job market, home sales were miserable and Americans were being cautious with their spending.
What first changed the tone of the market and started soothing double- dip worries was the Sept. 1 release of figures that showed surprisingly strong growth in the U.S. and Chinese manufacturing sectors.
More news trickled in throughout September that, if not terrific, was at least not bad. Payrolls and orders for durable goods improved, there was a flurry of corporate deals, and there were hints from the Fed about further help. The rally was on.
“It’s a huge relief, and it was absolutely unexpected,” said financial adviser Jon Stein, chief executive of an online brokerage called .
While the gains did a lot for 401(k) accounts and other investments, the rally was rather thin, and some market observers say it won’t last.
Forecasts mostly sunny
The Associated Press interviewed dozens of stock-market experts this week to solicit their opinions about the recent rally and ask about the market’s direction. Here is a sampling of their responses, including forecasts of where the Standard & Poor’s 500 index will end the year.
Expert: Rob Arnott, chairman of Research Affiliates.
S&P at end of year: Between 1,000 and 1,200.
Reasons for rally: Expectations that the Federal Reserve is poised for another round of “quantitative easing,” a form of stimulus in which it would buy Treasury bonds to inject money into the economy.
Expert: Kate Warne, investment strategist for Edward Jones.
S&P at end of year: Slightly higher, perhaps 1,150 to 1,200.
Reasons for rally: Better economic news, the Fed’s pledge to take steps to avoid deflation, absence of pre-earnings warnings or other bad news from companies.
Expert: King Lip, chief investment officer, Baker Avenue Asset Management.
S&P at end of year: 1,200.
Reasons for rally: Midterm elections expected to hand Republicans some seats, resulting in more balanced federal government; upcoming quarterly earnings reports expected to show improved profit.
Expert: Robert Doll, chief equity strategist, BlackRock.
S&P at end of year: 1,200.
Reasons for rally: Economic data turned out to be not as bad as investors thought, coupled with rhetoric out of Washington that was more investor-friendly.
Expert: John Praveen, chief investment strategist, Prudential Financial.
S&P at end of year: 1,300.
Reasons for rally: Fears of a double-dip recession and deflation were overdone; improved economic growth.
