Rally erupts as consumers feel better

The Dow jumps around 200 points after a report shows consumer confidence.

By MSN Money May 26, 2009 1:29PM

Charley Blain and Elizabeth StrottThose elusive "green shoots" seem to be back.


Stocks were soaring after the Conference Board's report on consumer confidence showed a reading of 54.9 in May, a surge from the upwardly revised reading of 40.8 in April. Economists had been looking for a reading of 43.


"Expectations are that business conditions, the labor market and incomes will improve in the coming months," said Lynn Franco, director of the Conference Board's Consumer Research Center. "While confidence is still weak by historical standards, as far as consumers are concerned, the worst is now behind us."


That optimism sparked a broad rally today. At 1:15 p.m. ET, the Dow Jones Industrial Average ($INDU) was up 200 points, or 2.4%, to 8,477. The Nasdaq Composite Index ($COMPX) had surged 54 points, or 3.2%, to 1,746, and the Standard & Poor's 500 Index ($INX) had gained 22 points, or 2.5%, to 909.


The Nasdaq-100 Index ($NDX.X), which tracks the largest Nasdaq stocks, was up 46 points, or 3.4%, to 1,409. An upgrade pushed shares of Apple (AAPL, news, msgs) pushed up 6% to $129.89. Apple's gain contributed 10 points to the Nasdaq-100's gain.



It was the biggest gain for consumer confidence since April 2003, and the reading puts the index at its highest level since September, before the global market meltdown.


The Conference Board's index of present conditions rose to a reading of 28.9 in May, up from 25.5 in April. Its gauge of expectations for the next six months rose to 72.3, the highest level since December 2007. That index came in at 51 in April.


"Expectations about the job market ahead improved much more, with 20% now indicating they expect there to be more jobs in six months than now," David Resler, the chief economist at Nomura Securities, wrote in a note to clients this morning. "The improvement in the confidence index also appears to have put more people in the mood to spend on cars and appliances but caution about the housing market persists.


 Overall however, the improved mood of consumers is encouraging. If the job market stabilizes, the improvement in confidence could translate into more spending and make the better outlook a self-fulfilling prophecy."

The report set a record low of 25 in February; in contrast, the index was at 120 in October 2007.


Home prices fall at record pace

On the other end of the spectrum was today's report on home prices, which painted a grim picture for anyone hoping for a housing recovery.


The S&P/Case-Shiller National Home Price Index posted a 19.1% plunge in the first quarter of 2009 from the first quarter last year, the biggest quarterly drop in the report's 21-year history.


The 20-city index fell 2.2% in March from February and declined 18.7% from March 2008. Economists had expected the index to have fallen 17% in March, after falling 18.6% in February. The 10-city index fell 18.6% in March.


"We see no evidence that that a recovery in home prices has begun," said David Blitzer, chairman of the index committee for Standard & Poor's, which compiles the Case-Shiller index.

The national index covers almost all homes sold throughout the United States and is reported quarterly. The group's 20-city index reports sales in 20 major metropolitan areas and comes out monthly.


All 20 cities in the index showed year-over-year declines; Phoenix and Las Vegas suffered the worst, with drops of 36% and 31%, respectively.


From the housing market's peak in June 2006, home prices are down 32.2%, and on average are at the same level they were at in the fourth quarter of 2002.


The supply of existing homes sits at 9.8 months, according to the Commerce Department, but the real amount -- once you add in homes owned by banks and investors -- is actually more than 12 months, according to The Wall Street Journal.



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