Stock market's message: Maybe things aren’t so bad after all?

Stock market powered forward Thursday with the Dow rising nearly 340 points. By one measure, October could be the Dow's best month ever. Behind the stock market optimism is there a sign of economic hope?

By , Staff writer

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    Trader Edward Curran works on the floor of the New York Stock Exchange Thursday. The stock market is poised to have one of its best Octobers in decades.
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The stock market seems to be trying to send a message: the economy may not be so bad after all.

In a remarkable surge, the Dow Jones Industrial Average is on track for the largest monthly percentage gain in its 115-year history. The last time the Standard & Poor’s average had such a good month was November 1974, when Gerald Ford was president. Some of the market averages are now showing gains for the year.

On Thursday, after word that European leaders had reached some sort of agreement on their debt crisis, the stock market started strong and the Dow finished with a gain of 339.51, its strongest gain since Aug. 11. Unless the market stumbles badly on Friday, it would be the fifth consecutive week of gains.

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There are important implications for the economy if the stock market remains strong. The stock market is often viewed as a leading indicator of the economy. In addition, most Americans see reports of the market’s moves, which can lead to growing consumer confidence. And, finally, many CEOs look at their stock prices every day and may view a strong market as a green light for expansion.

“Most companies are right in the middle of setting their budgets for 2012, and when they see the market surge, they might rethink any conservative plans they have,” says Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Ore.

Stock market analysts say the market’s gain is the result of a convergence of three or four factors at once. They include:

  • The Commerce Department Thursday reported the nation’s third quarter gross domestic product (GDP) grew at a 2.5 percent annual rate, about what was expected. But consumer and business spending showed some resilience. In addition, business inventories shrank, setting the stage for stronger growth ahead, says Michelle Meyer, an economist at Bank of America/Merrill Lynch in New York.
  • Many companies are alerting Wall Street that earnings and revenues are better than anticipated in the current quarter, Mr. Dickson says.
  • Portfolio managers, worried about the prospects of a double-dip recession, had amassed large piles of cash, which are now flooding back into the market. “They are now trying to put it back to work,” says Mr. Dickson.
  • Some of the world economic news is starting to look brighter, says Sam Stovall, chief equity strategist at S&P Capital IQ in New York.

For instance, “instead of the fears of a hard economic landing in China, it seems China will engineer a soft economic landing,” says Mr. Stovall.

At the same time, he says Wall Street was relieved that the European leaders had negotiated a deal on the Greek debt. The investors who hold that debt will get 50 cents on the dollar. Although some of the details still need to be worked out, Stovall says, “At least now the losses are quantifiable.”

Stovall notes that the market’s rally has come against the backdrop of the Occupy Wall Street protesters complaining about corporate greed.

“Maybe they are a good luck charm, and you don’t want them to go away,” he quips.

Looking ahead, Dickson says the market will face a major obstacle in November when a congressional fiscal commission has to deliver its report on budget reform. The commission is supposed to find ways to cut $1.2 trillion from the budget during the next 10 years.

Last summer, when the Congress could not agree on increasing the debt ceiling, the stock market fell sharply as investors watched both political parties rev up the rhetoric.

“Whatever recommendations are received, I hope they are debated in a more congenial forum then July,” says Dickson. “I hope the politicians have learned their lesson.”

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