The old maxim, “It doesn’t pay to fight the Federal Reserve” coined during the Greenspan era, is proving true once again. The recovery of the stock markets—the S&P 500 is up more than 30 percent from it its low, and credit spreads returning to normal—are signs that investors should not fight the Federal Reserve.

The Fed has jumpstarted this recovery with short-term interest rates at or below the inflation rate and $2 trillion to date being spent or lent to buy down mortgage rates, just as it did under Greenspan earlier in the decade.

And we are beginning to receive confirmation that the recession could officially end this summer with the Conference Board’s Index of Leading Economic Indicators (LEI) jumping 1 percent in April after falling for more than one and one-half years—which has been the length of this recession to date.

Eight of its ten indicators that indicate whether the economy is growing or contracting expanded–including stock prices, manufacturers’ new orders, and a huge jump in consumer expectations. Even the average work week expanded for the first time in a year.

The Conference Board’s Coincident Index that mirrors the 4 indicators used by the National Bureau of Economic Research to call a recession or recovery is also beginning to show recovery. Personal income and manufacturing and trade sales both edged up, while industrial production and unemployment are showing signs of bottoming.

Once these last 2 indicators show signs of revival, the recession will be ‘officially’ over. But that may not be announced until much later, as I have said in past columns. Our last recession ended in November 2001 but the NBER didn’t pronounce it over for another 16 months or so. We can know for ourselves, however, by watching the employment numbers. It is usually the last indicator to show improvement from a downturn.

We know that the banks are healing, in spite of fears of the toxic assets on their books. And the credit markets are already showing signs of improvement; albeit with ample government aid, according to Treasury Secretary Geithner. “Concern about systemic risk has diminished and overall credit conditions have improved”, he said in recent congressional testimony. “Leverage has declined; the most vulnerable parts of the nonbank financial system no longer pose the same risk; and banks are funding themselves more conservatively.”

The last major program yet to be implemented is the public-private plan to buy up those forenamed toxic assets, which should start in 4 to 6 weeks, according to Geithner. Now that we have the stock market in recovery mode as well, all eyes will be on the real estate sector—foreclosure rates in particular.

We know that housing prices with conforming loan amounts have risen nationally for the past 2 months, according to HUD. The overall foreclosure rate has yet to decline, in part because there is no dependable benchmark for real estate values, as yet. And sale of the so-called ‘toxic’ assets—mostly jumbo Option and Alt A ARMs—will help to establish a value for those higher priced homes that must happen to bring down the soaring foreclosure rates in California and Florida.

Therefore Geithner, Bernanke, et. al., are saying that the pessimists who are betting against our government’s actions, whether by shorting stocks or betting the U.S. economy will remain much longer in recession, cannot win.

Harlan Green © 2009