Shock effect of bad news wears off

Americans feel lousy about things -- the worst they’ve felt since Jimmy Carter was president, a new consumer confidence survey shows.

Stock market bears were counting on just this kind of gloom to send share prices careening lower again this spring. Yet Wall Street hasn’t been cooperating with Team Bear, much to the benefit of your 401(k) retirement account.

On Friday, despite the consumer confidence downer and another record high in oil prices, the Dow Jones industrials recovered from a 100-point slide to finish almost flat for the day -- and up 1.9% for the week, at 12,986.80.

The New York Stock Exchange composite index rose 0.5% on Friday to 9,603.01, its highest close since Jan. 3. It’s up 13.1% since March 17. And that isn’t just because of energy stocks.

The stock market often seems to live in a reality all its own, to the alternating frustration of both optimists and pessimists.

But there’s a simple answer to why sliding consumer confidence and rising oil prices haven’t been enough to halt the market’s spring rebound: Those trends just aren’t all that shocking anymore.

Investors already know the consumer feels bad. And they’ve gotten used to oil moving up. The bears may need another story line to do some serious damage to stocks.

Of course, it has helped mightily that the Federal Reserve has lent unprecedented sums to banks and major brokerages since mid-March to stem the housing crisis-induced credit crunch and pull the financial system back from the brink of a meltdown.

Investors’ mood also has been buffered by the economic data of the last couple of months. The numbers have generally been weak, but it still isn’t clear that the U.S. has actually fallen into recession, meaning an outright contraction of the economy.

Maybe the bigger surprise is that growth overseas hasn’t taken the hit many people thought was certain given our economic struggles.

Japan on Friday said its economy grew at a 3.3% annualized rate in the first quarter, beating expectations, thanks to strong global demand for the nation’s exports. On Thursday, Germany reported annualized growth of 6.3% for the quarter, also far better than expected.

“The rest of the world hasn’t slowed with the U.S.,” said Christopher Rupkey, economist at Bank of Tokyo-Mitsubishi UFJ in New York.

The widespread assumption, however, is that some slowdown is inevitable overseas, and soon.

The most optimistic scenario for the global economy (and stocks) goes something like this: Just as growth begins to ease in Europe, and perhaps in Asia and Latin America, U.S. consumers begin to feel at least a little better.

Tax rebate checks now are finding their way into 130 million mailboxes. That money can’t begin to cover what many people have lost to falling home values. But even if the cash just helps pay for gasoline, it’s something.

Tony Dwyer, market strategist at FTN Midwest Securities in New York, says Wall Street bears may be overlooking another source of help for strapped consumers: the cost savings on hundreds of billions of dollars of home equity credit lines tied to the prime lending rate. As the Fed’s interest rate cuts have pulled the prime rate down to the current 5% from 8.25% in September, the interest bills on those credit lines have tumbled.

Maybe so, but that doesn’t seem to be registering in confidence surveys. The latest Reuters/University of Michigan consumer sentiment index reading, reported Friday, was 59.5, down from 62.6 in April and the lowest since June 1980. “Record numbers of consumers viewed the economy in recession and saw little hope of recovery any time soon,” the report said. And consumers’ inflation expectations rose -- which must spook the Fed.

Friday’s report jibed with a recent L.A. Times/Bloomberg poll that showed 78% of Americans believed the economy was in recession, and that only 19% foresaw a better economy in six months. Does that sentiment become self-fulfilling -- or is the crowd view now so downbeat that there’s nowhere to go from here but up?

Oil may yet hold the key. If it keeps rising, it may finally reach a price too high for consumers to stand and for Wall Street to ignore, providing a handy excuse for investors to take some profits from the stock market’s recent run-up.

On the other hand, if the surprise is that oil (finally) pulls back, imagine the joy in Mudville. After $126-a-barrel oil, even a price of $95 would feel like a bargain.

--

tom.petruno@latimes.com