Despite the Economy's Struggles, Stock Market Soars

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Brendan McDermid / Reuters

Traders work on the floor of the New York Stock Exchange, July 15, 2009.

The stock market rose powerfully on Wednesday, with the Dow jumping 3.1% to 8,617 and the small-stock Russell 2000 index rising 3.9%. That's more than most bond funds return in a full year, and it was the best daily performance in the last three months for many market indexes, including the Dow and the S&P 500; the broad S&P index is up 6% this week alone.

So what's the reason for all this bullishness? Surely not the economy, which continues to muddle along through the muck of heavy consumer debt and a poor housing market. But businesses are in better shape, and the financial crisis seems to be fading from view, even as small business lender CIT struggles to survive another day. (Stock futures turned negative after the market close on news that CIT was not likely to get a government rescue.)

Market sentiment was boosted earlier in the week by a surprisingly good profit report from Goldman Sachs, which logged second quarter earnings of $3.4 billion and an eye-popping return on equity of 23%. Investors got a second round of heartening news on Wednesday morning when Intel reported sales that were 10% better than analysts had been expecting; Intel's earnings also beat expectations by a wide margin and the company offered encouraging guidance about the third quarter. The chipmaker's shares rose more than 7% Wednesday, putting the stock's rise so far this year at 25%. Intel's Wednesday move triggered a strong rally across the tech sector, which climbed more than 4%. Financial shares finally joined in on Goldman's good news from earlier in the week and rose 4.8%. By the market close Wednesday, every major market sector was in positive territory.

The latest news on the economy, though not positive, was at least benign, and that helped ease investor anxiety. Industrial production, reported Wednesday morning, is still declining, though the pace of decline is the slowest in eight months, adding another green shoot to the optimists' garden. A further boost to investor confidence came from just released minutes of the June meeting of the Federal Open Market Committee. The minutes revealed that most Fed officials believe the 18-month old recession is nearing an end.

In the days ahead investor optimism will be tested as financial and consumer companies reveal their second quarter results and provide guidance on their business outlook for the months ahead.