The Good News: New Policies, Commodities, Interest Rates and Credit Markets

(MoneyWatch)  (Note: This item is part one of a series on the good economic news that may be missed by the media. For other posts in the series, see the link at the bottom of this item.)
If you're like most investors, you're probably tired of hearing all the bad news about the economy. It seems like the media is living by the adage "if it bleeds, it leads." You should know there is good news out there about the economy.

First, our current government seems to have learned from the mistakes made in the 1930s, when both the Federal Reserve and the government enacted procyclical policies such as raising taxes and restricting international trade that exacerbated the recession. While you may not agree with all of the policy decisions that have been made by this administration and the Fed, I would argue that the policies have neither been in the wrong direction nor of insufficient size.

The markets also know that both monetary and fiscal stimulus work with a lag. That's why the stock market is a leading indicator, tending to recover well ahead of the economy. Therefore, even though unemployment is likely to continue to rise (as unemployment is a lagging indicator), the stock market may have already started its recovery. And the best returns to stocks have typically been at the depths of the recessions. For example, in just the two months of July and August 1933, the S&P 500 Index rose about 90 percent.

Second, we've had a massive drop in commodity prices. Oil is down about $100 from its peak, and virtually all industrial and agricultural prices are well off their peaks. The drops in prices has the same stimulatory effect as a massive tax cut. The fall in inflation helps keep interest rates low, which also has a stimulatory effect.

Third, the sharp drop in interest rates has led to the lowest mortgage rates in about 50 years, with 30-year mortgages dropping under five percent. For those able to refinance, this too acts like a large tax cut. And the combination of lower mortgage rates and the drop in home prices makes homes much more affordable, which is beginning to stimulate demand.

Fourth, the Fed's actions to unfreeze the credit markets seem to be working. For example, while the corporate bond market was basically nonexistent at the end of last year, about $975 billion in corporate bonds have been issued world-wide as of April 13. This is a faster pace than the start of 2007, which saw a record $2.127 trillion issued. This is critical, as restoring the normal functioning of the credit markets is key to an economic recovery.

As I have said before, markets are efficient and incorporate news -- both good and bad -- nearly instantaneously, even if the media only highlights the bad. This is part of the reason we have seen positive market movements. In my next post, you will see more good news and the effects it may be having on the market.

Follow the series "The Good News":

• Part one: New Policies, Commodities, Interest Rates and Credit Markets
• Part two: Bank Profits, Productivity and Less Capacity