Good Economic News Finally Arrives

(This article is part of a series on how to view economic news. To see why you shouldn't react to such news, see Wednesday's post "Why Good Economic News Isn't a Good Indicator for Stocks.")
It looks like the good recent economic news is causing investors to jump back into stocks. Many investors fled the equity markets after the recent financial crisis and continued to run away despite the strong rally we've been experiencing since the low of March 9, 2009. The S&P 500 Index closed March 9, 2009 at 676. The price-only index is up 86 percent since then. Including dividends, the return would be even higher.

However, now that good news appears on the horizon, many investors are plowing back into stocks. In the past three weeks, equity funds have had inflows totaling $18.8 billion, while bond funds have only seen $1.2 billion.

Here's a quick recap of some of the reasons why investors appear to finally be convinced that the economy is now on safer ground:

• While the unemployment rate remains stubbornly high, new claims for unemployment have fallen sharply, down to 420,000 for the latest reporting week after peaking at 504,000 in August.
• The index of leading economic indicators rose 1.1 percent in November, the fifth straight month of increases, marking a new high for the series which dates back to 1959.
• November retail sales rose a strong 0.8 percent, the fourth increase in the past five months.
• The Federal Reserve continues to pursue a very accommodative monetary policy, keeping the Fed Funds rate basically at zero. And despite the better economic news, it is continuing its bond buying program.
• The uncertainty over tax rates for 2011 was eliminated when Congress passed the extension of the Bush tax cuts. The bill also included another huge dose of fiscal stimulus.
• Economists are now forecasting faster and robust economic growth for 2011. For example, Morgan Stanley recently raised its forecast for the growth of the GDP to 4 percent.

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