Signs of Stability Drive Up Stocks Article

By JUSTIN LAHART and JON HILSENRATH The stock market rose Friday to cap its best week since November, as scattered bits of good news from shopping malls to metals markets gave some reason to believe that the economy may be getting closer to a bottom. Consumers are still cutting back, but not as steeply as they were, data showed this week. Many retailers have reduced inventories on their shelves to the point that any pickup in demand will force them to restock. Prices for copper and scrap steel are rising, a hint that manufacturers are buying again. Oil prices are up 23% in the past four weeks, a sign demand may be firming. Shipping rates, sensitive to goods moving across the oceans, turned up even as governments reported declining world trade for January. Most visibly, the stock market is up -- at least for now. After falling to its lowest level in 12 years on Monday, the Dow Jones Industrial Average on Friday gained 53.92 points to close at 7223.98, clinching a 597.04-point, four-day rally. The Dow finished up 9.01% for the week, though it remains 49% below its October 2007 peak. The S&P 500 and Nasdaq composite indices also had their best weeks since the end of November. Word this week from Citigroup Inc., J.P. Morgan Chase & Co. and Bank of America Corp. that their underlying businesses were profitable in the first months of the year -- along with the latest government reading on retail sales for February -- gave the market a "little assurance that, yes, there is a real economy out there and it has a chance of doing better," said Todd Clark, director of trading at Nollenberger Capital Markets. Related Markets Extend StreakDiscuss: Is the worst over for stock market?MarketBeat: Yes, There Are RalliesVideo: OPEC, G-20 On DeckStill, most economists say the U.S. economy will shrink at a very steep 5% annual rate or so in the current quarter, which ends March 31, and that it will continue to contract at a more modest pace in the second quarter. Federal Reserve Chairman Ben Bernanke said this week that even if financial markets stabilize, he doesn't expect the recession to end until later this year. At several moments during the recession that began in December 2007, the worst appeared to be past -- and then the economy worsened. While the stock market is happier, debt markets aren't, though they're in better shape than they were late last year. The spread between U.S. Treasury yields and the yield on high-quality corporate bonds, measured by the Merrill Lynch High Grade Index, stands at a still-high 6 percentage points, though down from 6.50 as recently as mid December. A high spread is a sign that investors are demanding more money from borrowers to compensate them for heightened risk. The bond market is saying "economically you're in for a rough ride," said Greg Peters, head of fixed income research at Morgan Stanley. President Barack Obama, speaking with reporters at the White House on Friday, said he was "confident" the country would get through the crisis, but warned that the U.S. won't enjoy a return to the euphoric times of earlier this decade. Days of overheated housing markets and maxed-out credit cards are over, he said. "We are laying a foundation for what I'm calling a 'post-bubble economic growth' that won't repeat the risks that led to the current crisis," he said. White House economic adviser Lawrence Summers issued a cautious outlook on Friday. "It is surely too early to gauge the broader economic impact of the president's program'' of $787 billion in tax cuts and extra spending, he said. "But it is modestly encouraging that since it began to take shape, consumer spending in the U.S., which was collapsing during the holiday season, appears, according to a number of indicators, to be stabilizing." The rise in the stock market, even if it isn't always a reliable predictor of the direction of the economy, could offer a sorely needed boost to confidence. "What you're trying to do is reverse psychology," said Robert Barbera, an economist at ITG, a research and trading firm. "You're trying to get people to think of the glass as a third full instead of 97% empty. Once you do that, the enthusiasm about things improving can do a lot of the heavy lifting." Past experience shows that when demand falls sharply, it often rebounds sharply as consumers and businesses start buying. That's not happening yet, but the latest government data shows signs of stabilization. The government said earlier this week that retail sales fell by a slight 0.1% in February from January, after an upwardly revised 1.8% retail sales increase in January from the month before. And the preliminary reading on the Reuters/University of Michigan survey of consumer confidence for March increased to 56.6 from 56.3 in February. "We did see a pick-up in January," said Lisa Howe, 58, co-owner of Artisans on the Avenue, a clothing and crafts shop in Philadelphia. "People had a little bit more money, a small bonus, a check from grandma, that kind of thing -- plus, the entire place was on sale," she said. Now, she's seeing a few more shoppers looking for spring items like sundresses or lightweight sweaters. Many companies are continuing to cut back. Manufacturing output fell at an 18% annual rate in the fourth quarter of 2008. Laurence Kantor, head of research at Barclays Capital, estimates output could fall at a 25% rate in the first quarter of this year. That's largely because producers got stuck with too much stuff after consumers sharply cut spending last year. Now they have to cut further to clear their shelves of stockpiles. "Producers are doing everything they can to get ahead of the decline in demand," said Mr. Kantor. Intrepid Potash Inc., a Colorado company that makes potash and other materials for fertilizer, could be an indicator of production stabilizing. Throughout February, it had rolling shutdowns of two large mines in Carlsbad, N.M., to adjust to a buildup of inventory at dealers, caused by a global drop in demand and an autumn season marked by bad weather. With spring planting under way, the firm is nudging up production as some of the inventory clears. On March 9, Intrepid had both facilities up and running again, though it was running them 18 hours a day instead of 24. "Spring is going to come," said William Kent, the firm's director of investor relations. "Crops will be planted and farmers will farm. You have to produce because there is going to be some demand out there." In contrast, Steinway Musical Instruments Inc., the piano manufacturer, is still struggling with larger-than-desired inventories. Sales fell 22% in the fourth quarter from a year earlier, leaving the company and its dealers with more unsold pianos than they wanted. Steinway's inventories were up 9% on Dec. 31 from a year earlier. It is still trying to reduce them. In a recent conference call with analysts, Dana Messina, the firm's chief executive, said the company might have another $20 million worth of cuts, but that it had already made substantial progress. The best way to reduce inventories, of course, is to sell more. And there are some signs of rising sales in the semiconductor industry, considered by some investors as a good leading indicator of technology spending. Texas Instruments, in a conference call with investors, said this week that orders have risen this quarter, and it nudged up its sales expectation. Xilinx Inc., another semiconductor company, also recently raised its sales forecast. There are other signs that the industrial economy is nearing a bottom. Prices for industrial metals are rising. Copper has risen 8.7% in New York trading this month, and it is up 18.9% for the year. Among Wall Streeters, copper is sometimes called "Dr. Copper" -- the metal with a PhD in economics -- because its prices are believed to signal turning points in the global economy. Copper is widely used in construction and in an array of electronics and telecommunications equipment. Scrap steel prices have also been moving higher. Ken Safian of Safian Investment Research sees the price gains as a sign that companies have drained their excess inventories of raw materials. "People are going to start committing their money at some time as long as they have some confidence," he said. In addition, some freight rates are turning up. The Baltic Dry Index, a measure of global shipping prices that is very sensitive to global demand for moving goods around the world, is rising. The index collapsed last year, and it is still well below its highs, but so far this year it's nearly tripled. On Tuesday, Doug Stotlar, CEO of trucking firm Con-way Inc. told investors that his company has seen a business pick up this month. "We hope that we're at the bottom," he said —Tom Lauricella and Kelly Evans contributed to this article. Write to Justin Lahart at justin.lahart@wsj.com and Jon Hilsenrath at jon.hilsenrath@wsj.com