Turning up the heat on the BBQ recovery

The low and slow economic recovery is continuing. But good news about jobs, inflation and banks might mean it's soon time to lift the grill.

NEW YORK (CNNMoney) -- The economy is slowly but surely getting better. That's the good news. The bad news is that the market has already figured that out.

You would think that better-than-expected results from Bank of America (BAC, Fortune 500) and Morgan Stanley (MS, Fortune 500), combined with reports that showed a huge drop in jobless claims and inflation as not a problem, would have lifted stocks to the moon Thursday.

• Print
• Comment

Yet the market was essentially flat, as investors paused to digest all the data and reconsider whether or not this latest rally has legs. After all, the S&P 500 (SPX) has already gained more than 4% in just two-and-a-half weeks while the Nasdaq (COMP) is up a scorching 7% so far in 2012.

It's true that investors may be getting ahead of themselves a little bit. A pullback in stocks wouldn't surprise me, especially if Europe's debt problems take a sudden turn for the worse again.

"The absence of bad news in Europe seems to be enough for the market to go up lately," said Brian Gendreau, market strategist with Cetera Financial Group in Los Angeles. "But there are still some headwinds."

Still, the latest batch of earnings and economic releases should hopefully put an end to the double-dip recession talk for good.

The labor market is improving. That's undeniable. It's still not completely healthy of course. But it is in considerably better shape than a year ago when the unemployment rate was closer to 10% than 8%.

The financial sector is finally showing some signs of life too. Now I've long argued that investors in BofA, Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500) and other big Wall Street firms still need to be wary of these stocks because of concerns about Europe and a slowdown in trading and investment banking activity. I still would be nervous even as their stocks have all rebounded sharply this year.

Want jobs? Upgrade your wireless network

However, the good news from these banks is that despite the troubles in their market-related divisions, they all have reported better results from their retail operations -- the quaint business of lending and taking deposits.

Credit quality is improving and the big banks are loaning more as well. That's fantastic news. Smaller regional banks, such as Huntington Bancshares (HBAN), PNC (PNC, Fortune 500) and BB&T (BBT, Fortune 500), have also been reporting loan growth.

And as long as the unemployment rate keeps heading south and businesses hire even more new workers, then the good news from banks should continue.

"The economy still is likely to grow on the slow side in 2012, but the jump in lending is a bright spot," said Gendreau.

Although I now risk raising the ire of Ron Paul (and Newt Gingrich?) supporters, the Federal Reserve probably deserves to take a bow for the improvement in bank lending.

The Fed has kept short-term rates near zero since late 2008 and has (admittedly artificially) helped hold longer-term bond rates low with its two and a half rounds of Treasury bond purchases. (Operation Twist is more QE 2.5 than QE3.) It seems that low rates are finally leading to increased demand for loans from consumers and businesses plus a willingness by banks to make them.

When the Fed's policy committee meets next week, it will likely reiterate its pledge to not raise interest rates until at least the middle of 2013. But it also should acknowledge the signs of life in the economy and hopefully will not hint that a third round of quantitative easing could be in the cards.

While some might argue that the worst thing that the Fed could do now is to raise rates too soon and choke off the nascent recovery, I'd argue that more stimulus could be a bigger disaster since it could create more inflation and raise more fears of asset bubbles.

A new stimulus: Have Wall Street bail out Main Street

Mortgage rates continue to drop. The 10-year Treasury still is yielding less than 2%. There is no longer a need to lower rates further. If anything, we should be rooting for rates to climb a bit higher since bond yields are still below the 3% annualized inflation rate.

Plus, low yields are a potential sign that the bond market still doesn't believe the recovery is for real. The Fed would just fuel those fears if it thinks it needs to do more to prop up the market.

"The economy is improving. I am not sure what more bond buying would accomplish," said Joe Balestrino, chief fixed income market strategist with Federated Investors in Pittsburgh.

"If we can just get Europe off the front page every day, people will realize that the U.S. economy is in better shape than everyone thought last summer and that rates should move higher," he added.

Exactly. Economists surveyed by CNNMoney late last year are predicting gross domestic product growth of only about 2.4% in 2012. That's still subpar. But it's not awful.

"It's not a great environment but we have stopped going backwards," Balestrino said.

I've referred to what's happening in the economy as the BBQ recovery since the middle of 2010. (I should have trademarked it!) It's a low and slow rebound. That hasn't changed.

But the good news is that it might finally be time to lift the lid on the grill and flip the burgers. With each passing day, the economy is moving closer to a real, sustainable recovery.

Best of StockTwits: Bank of America's earnings delighted many investors and the stock is on track to close above $7 for the first time since late October. But there are still many skeptics.

MikeTwits: $BAC irrational exuberance has begun... time to trade trends and worry about valuation in Q2

To be fair, valuation isn't really the issue. It's below book value. BofA is cheap. But it may be cheap for a good reason. I'd be nervous until we know for sure that the legal headaches due to bad mortgage bonds have completely disappeared.

Ktr8der: So, $BAC only needs what.. another 6000% to get back to 2007 levels? no position.

The '07 peak was about $54 a share. So BofA needs to only go up another 600% or so as opposed to 6000%. But who's counting?

sellmeonu: $BAC When 1+1+1=4 One time charges people.

newnormsurvivor: $BAC mostly one time gains due to sale of assets

That is another cause for concern. A long-standing criticism of banks is that their results are opaque with a Big O. (Not to be confused with Oscar Robertson. Or Overstock.com.) There is a certain amount of wizardry involved with understanding the numbers. Which leads me to ...

ivanhoff: Harry Potter works in the accounting department of $BAC

Or Lord Voldemort.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.