It's hard to find signs of life in the economy, but the signs of death seem to be growing fainter.
In what passes for good news these days, Treasury Secretary Timothy Geithner told CNBC last week, "You're seeing the pace of deterioration start to slow in some areas."
Investors who share an inkling that the worst could soon be over have started a revival in the stock market. Since its March 9 low, the Standard & Poor's 500 index is up 20.6 percent, although it is still 48 percent below its all-time high in October 2007.
Generally, a 20 percent increase qualifies as a bull market. Whether this year's March madness marks the beginning of a new bull market, or a temporary rally in an ongoing bear market, is an important question not just for investors, but for everyone.
Why? Because the stock market is a fairly reliable leading indicator of the economy.
Over the past 60 years, recessions typically ended four or five months after a new bull market began, according to Sam Stovall, S&P's chief investment strategist for equity research.
During this period, the S&P 500 correctly anticipated the end of a recession 9 out of 10 times, he adds. The exception was in 2000 to 2002, when the economy recovered before the stock market.
If stocks really did hit bottom on March 9 - and that's a big if - history would suggest that the recession could end in the third quarter of this year.
Employment, considered a lagging indicator, wouldn't pick up until months after that. In Stovall's study, the unemployment rate didn't start falling until about four months after a recession ended, and eight or nine months after a bull market began.
S&P economists say the current recession will end late in the third quarter of this year. That's when things "will stop falling. It doesn't mean things will be getting better," Stovall says.
He predicts that the U.S. unemployment rate, 8.1 percent in February, will peak at 9.75 percent in the second quarter of 2010 and decline very gradually in the second half.
If the stock market has not really embarked on a new bull market, then a recovery in the economy and employment would come even later.
Brief outbreaks of optimism are common during long bear markets. Between Nov. 20 and Jan. 6, the S&P 500 surged 24 percent, only to plunge back to a new low on March 9.
5 bear rallies in 1930s
During the early 1930s, the Dow Jones industrial average staged five bear market rallies of 20 percent or greater before hitting an ultimate bottom in 1932. The most famous was a 48 percent gain in 1930.
Tom McManus, chief investment officer with Wachovia Securities, says the market will give up at least half of its March gains.
"We are in a bottoming process, where the market is winnowing out the winners from the losers," he says. "March 9 was probably a bottom for the quality stocks. It's probably not a bottom for the lower-quality stocks."
He says there's a 40 percent chance the overall market could fall below its March 9 low.
Durables are volatile
McManus doesn't put much faith in the signs of stabilization that some analysts see, such as better-than-expected reports on durable goods, home sales and retail sales.
Durable goods is so volatile, he says, "I would never use it as a signal the trend has changed."
Some analysts cheered when the government reported that retail sales in February were down only 0.1 percent (economists were expecting a 0.5 percent drop) and revised January's surprise increase upward to 1.8 percent from its original estimate of 1 percent.
When you look at the drop in retail sales over the previous three to four months, "the size of the improvement is microscopic," he says. "It's like saying your kid took a test and got 1 right out of 20. The next time he got 2 right out of 20. You could say, 'Wow, he did twice as well.' But it was still horrible."
McManus says the S&P 500 might "bounce around 700-900 for another six months." It closed Friday at 816. Its low on March 9 was 677. He says the economy will start to recover at the end of 2009 or early next year.
He warns that investors should not try to pick the exact bottom. Instead, they should put money into the market gradually over the next six months. Five years from now, that will look like a very smart investment.
Patience can pay off
"The valuations are very attractive. Someone who is patient can make money. Focus on improving the quality of your portfolio," he says. That means dumping stocks that have gone down the most and putting money into high-quality companies that have been hurt less.
Rob Arnott, chairman of Research Affiliates, is gloomier on the economy.
"I don't see how the economy can turn around while we are engaged in this massive de-leveraging," he says. "Resources are being siphoned to pay down debt, both household and corporate debt. This process is going to take time, a lot of time. It's dangerous to assume the economy can suddenly pick up when the de-leveraging process is only just now gaining full steam."
Growth seen in 2010
Arnott says the economy won't start growing until 2010 and employment won't pick up until 2011. "I think unemployment will crest above 10 percent, perhaps significantly above. This will be ugly," he says.
For now, Arnott says investors should put money into corporate bonds, not stocks, on the theory that the stock market can't really recover until the credit markets do.
He says that corporate bonds did not show the same improvement in March that stocks did. Until they do, "I don't think this is a real bull market," he says.
This article appeared on page D - 1 of the San Francisco Chronicle