Download On March 9, 2009, the Dow Jones Industrial Average (DJIA) hit

The Recession is Over
Haley Araki
Owen Chen
Peter Shao
Richard Cheng
Dos Pueblos High School
On March 9, 2009, the Dow Jones Industrial Average (DJIA) hit
bottom at 6547 points. Since then, the capital markets have
experienced a strong recovery, with the DJIA up 60% and the S&P 500
up 70%. U.S. stock indices have risen through 2010 with
improvements in consumer spending, corporate earnings, industrial
production, housing, and labor markets. The recession is over, and as
the economic recovery gains traction, continued positive momentum in
U.S. stock markets through 2010 is expected, even as the Federal
Reserve Bank (Fed) begins to rescind expansionary policies. Although
the economy has moved from a recessionary to a recovery phase,
some volatility is expected as Europe continues to struggle.
In the first week of trading, the DJIA and S&P 500 started at
10,383 and 1108 points, respectively. The week began sluggishly as
the DJIA and S&P 500 slipped 0.63% and 0.95%, respectively, upon
reports of a larger than expected drop of nine points in the Consumer
Confidence Index. However, by the end of the week, U.S. stocks
regained momentum as the Commerce Department reported a GDP
growth rate of 5.9% for the fourth quarter of 2009. This was the
fastest growth rate since the third quarter of 2003, surpassing
expectations of 5.7% growth.
March began optimistically with an encouraging non-farm
payroll report released on March 5th. The report showed an increase of
39,000 jobs in February, beating expectations of a loss of 75,000 jobs.
The announcement led the DJIA to increase 1.1% as investors gained
confidence from the better-than-expected report.
The financial sector made aggressive gains in the week of March
15 as the Fed announced that it would keep the federal funds rate at
near-zero levels for an extended time. With this news, the S&P 500
reached a 17-month high of 1160 points. Along with strong gains in
the financial sector, the Volatility Index (VIX) reached its lowest levels
since May of 2008 hitting 16.6 on March 18. The low level on the VIX,
often called the "fear gauge" of the market, indicates increasing
investor confidence. In the following week, the stock indices continued
to see steady upward movement, providing strong evidence that the
recession is over.
In March, home buyers scrambled to take advantage of the
extension of the $8000 first-time home buyer’s tax credit. As a result,
the housing market was bolstered by a dramatic 27% increase in new
home sales—the largest single-month increase in almost five decades.
The DJIA responded favorably to this report with a 70 point increase.
The surge in home sales was also accompanied by an equally
impressive increase in building permits. The Commerce Department
reported a 7.5% increase in building permits in March from the
seasonally adjusted rate in February. The positive trends in the
housing market were further validated by the March home prices
increasing in more than 60% of U.S. cities.
An unexpected $1.95 billion increase in consumer borrowing for
the month of March suggested rising consumer confidence. It was a
reversal of economists’ expectations of a $3.85 billion drop. This spike
in consumer borrowing led to an increase in consumer spending. The
retail sales report for March showed a surprising gain, posting a 1.8%
increase from the previous month contrary to economists’ expectations
of a 0.2% decline.
This rebound was supplemented by signs of improvement in the
labor market. The Labor Department reported 162,000 new jobs
created in March—the largest monthly gain in three years. However,
as new workers entered the labor force, the unemployment rate
remained unchanged at 9.7%. The growth in jobs, homes sales, and
consumer confidence in March contributed to a five percent gain in the
DJIA and a 5.6% jump in the S&P 500.
After U.S. stock indices reached 52-week highs in March,
investors anxiously watched in April as the earnings season began.
Analysts were more optimistic, expanding their estimates of corporate
earnings. Indeed, the DJIA surpassed expectations as 26 of its 30
member companies outperformed their consensus estimated earnings.
The strongest report came from Bank of America which reported a
$3.2 billion net income for the first quarter compared with a net loss of
$194 million in the previous quarter.
The stock markets continued to move higher in April. Despite
increasing anxiety in Europe, the S&P 500 leaped above 1200 for the
first time in 18 months, as shown in the graph below, and the DJIA
reached an 18 month high, rising above 11,000. The April jobs report
showed continued growth in the labor market, posting a gain of
290,000 jobs. This was the fourth consecutive month of positive job
gains. Although the Labor Department reported a 0.2% increase in
unemployment, bringing the national unemployment rate to 9.9%, this
increase was the result of 805,000 discouraged workers reentering the
labor force. The 3.2% growth in GDP for the first quarter of 2010
reflected signs of improvement in consumer spending and business
investments, and provided additional evidence of a solid recovery.
The momentum the markets gained in March and April was
interrupted during May by the concern over Greece defaulting on its
debt obligations. As a result, on May 6th, the DJIA plummeted almost
a thousand points in only a few minutes and closed at 10,520, over
300 points below the start of the day. After such steady growth over
the last 14 months, the DJIA shocked investors with the largest
intraday drop in history. Although there is strong speculation that
technical system errors caused the dip, fears of the European crisis
also factored into the volatile decline that day.
The turbulence in the market has been reflected in the VIX
index. Market volatility nearly doubled during the first two weeks of
May, and hit a one-year high on May 7 at 35. Despite the robust jobs
report for April, the DJIA and S&P 500 both closed near pre-March
levels at the end of the first week of May. After two months of solid
gains in both stock indices, deepening concerns of the European debt
crisis and the future of the Euro essentially negated those gains.
The focus on Greece's monumental debt problem has revealed
the high current-account deficits and large amounts of external debt of
Portugal, Spain, and Ireland. On May 14th, the Euro hit its lowest
levels since the beginning of the crisis. In an attempt to save the Euro
from collapsing after only eight years of implementation, an
unprecedented bailout of $30 billion was put into place on April 23 by
the European Union (EU) and the International Monetary Fund (IMF).
Since then, the European Central Bank and the IMF have talked about
a trillion dollar bailout.
It is expected that this large bailout package will alleviate fears
of the European debt crisis derailing the U.S. economic recovery. This
is important because since Greece pleaded for and received their
bailout plan on April 23, the DJIA dropped 600 points by May 14th.
On May 15th, Timothy Geithner, U.S. Treasury Secretary, gave a
statement reassuring that U.S. growth will not be hurt by the
European turmoil and that "our economy is getting stronger. We're
seeing a lot of strength, improvement and confidence." Investors will
be keeping a close eye on the growing European crisis and the future
of the Euro because both could impact the U.S. regardless of
Geithner's optimistic outlook. Year to date, the 11% appreciation of
the U.S. dollar relative to the Euro threatens U.S. exports, hindering
GDP growth. Nevertheless, through the European crisis, the DJIA
remains above the pre-March level.
During the ten-week period, convincing signs have emerged
indicating the recession is over. The recovery is gaining traction as the
U.S. economy has made significant progress in the growth of jobs,
GDP, residential real estate, consumer spending, industrial production,
corporate earnings, and the stock market indices. During this period,
the S&P 500 and the DJIA, leading indicators, reached close to their
highest levels in nearly two years. At the same time, there has been
more volatility in the market, which could persist throughout the
remainder of 2010.
As the recovery gains traction, it is expected that the Fed will
begin retracting expansionary policies. Symbolically, the Fed raised the
discount rate in February. Absent any unexpected developments, the
Fed is expected before the end of the year to increase the federal
funds rate at a gradual rate to ensure that the momentum of the
recovery is uninterrupted. The strong gains observed in the last ten
weeks provide substantial evidence that the recession is over, and the
economy will begin a gradual transition from the recovery to an
expansionary phase by 2011.