The big jump in stock prices during the second quarter of 2009 represented not an improvement in the struggling U.S. economy, but a collective sigh of relief that the American financial system is no longer near the edge of the abyss.

With Tuesday’s close, the benchmark S&P 500 closed up for the quarter by 15% - its best quarterly performance since 1998. The Dow Jones Industrial Average posted a quarterly gain of 11%, its single-best quarter since 2003.

While a double-digit gain in stocks would be commonly celebrated, traders and investors said this quarter’s rally was more about the market no longer fearing that the U.S. banks were in danger of failing than a true economic recovery.

“At the beginning of March, there was a non-trivial possibility we were going to have to go live in caves,” John Feinman with Deutsche Bank Advisors said in a half-jokingly tone. “But now, the market realizes that the financial system is going to make it and the banks are going to survive.”

Some of the quarter’s best performers have been the banks themselves.

Shares of Huntington Bancshares (HBAN), a regional bank, jumped more than 160% in the quarter, while another regional bank Fifth Third Bancorp (FITB) saw its shares rise more than 140% in the quarter. Insurance company Genworth Financial (GNW) was the quarter’s best performer, soaring nearly 275%. However, all those names took it in the chin in 2008 as part of the general financial crisis. Genworth is down 60% from a year ago.

Two of the banks in question at the beginning of March – Bank of America (BAC) and Citigroup (C) -- also saw their shares rise sharply during the quarter. Both thos banks posted the bulk of their gains in March, which is not included in this quarter, after nationalization fears subsided.

“It took that climatic call in March for the market to finally flush everything out,” said Marc Pado, chief market strategist for Cantor Fitzgerald.

Despite the big gains, the bulk of this quarter’s rise came in April, which was mainly an aftereffect of the March fears. Trading in May and June was mostly flat, with the S&P 500 moving between a 40-point range for most of the period.
Pado said the market struggled to move above the S&P 500’s 920 mark because there was a general lack of economic news or company earnings to really give investors comfort that the recession was easing.

“We a great run, but now the market is waiting for the economic data to catch up with expectations,” Pado said.
Generally, the economic news for Wall Street has been overall better than expectations but still remains dismal by traditional standards. The nation’s unemployment rate rose to 9.4% in May, and is expect to rise to 9.6% for the month of June, according to current economist estimates.

Consumer confidence, a key indicator of future spending by the all-important American consumer, also remains lukewarm. Conference Board said Tuesday that consumer confidence unexpectedly tumbled to a reading of 49.3 in June, well below May's 54.8. A year ago, consumer confidence was at reading of 58.1.

“We’re going to have an economic recovery, but we don’t yet have the answer yet of what type of economic recovery we’re going to,” Feinman said. “That’s why the market has spun its wheels.”

For the next three months, investors said they will be looking for continued “less bad” economic reports to provide an impetus for stocks to move higher over the next three months. Notably, economic reports on business inventories, manufacturing activity, and capacity utilization are expected to be heavily influential.

“We need to see that economic production start in the third quarter that will hopefully lead to eventually sales in the fourth quarter,” Pado said, referring to the all-important holiday shopping season.