The opening quarter of 2009 may have redefined the meaning of volatility. The stock market, as measured by the S&P 500 Index, produced one of the worst January periods on record, the worst February since the Great Depression, then followed with the best March in six years, despite a low hit on March 9.

The S&P 500 gained 8.8 percent in March 2009, its best monthly performance since October 2002, when it also gained 8.8 percent. But over the first quarter of 2009, the index dropped 11.0 percent. Foreign markets fared worse over the quarter, dropping 15.58 percent, as measured by the MSCI EAFE Index.

So where does that leave us? On the side of an improving market, or still gripped by a prolonged downturn? While we do see small signs of improvement, we’re not clear of the vast problems we face. In April, the U.S entered the 17th month of this recession, the longest since the 1930s. The U.S. economy, as the second quarter of 2009 begins, is not in as good as shape as it was six months earlier. The unemployment rate is much higher. The economy is shrinking. For consumers, the good news is that inflation is lower and oil prices are roughly half what they were last autumn. Mortgage rates are a lot lower. This, in particular, has helped the housing sector, reducing the inventory of unsold homes. The Mortgage bankers Association saw its latest index of loan applications jump up by 4.7 percent and the purchasing index jumped by more than 11.0 percent. It is evident that there are qualified buyers out there and they are starting to take advantage of the lower mortgage rates and the substantial decline in the price of homes.

Yes, we are seeing signs of improvement. But how this translates to a further upturn in the equity markets remains unclear at this point. Greed, indifference and incompetence have shaken the global financial system to its core, while fear and political overreaction paralyzed the markets. It will take us some time to work through this and get to a positive result. Given all the money that the government has pushed into the system, and the scope of the fiscal stimulus plan, things should be improving over time. At the least, government action has finally started to be helpful in terms of the psychology of the financial markets.

By the end of March, we did receive more clarity on how the Treasury plans to help remove some of the toxic assets from bank balance sheets. While quite complex, this is a key initiative that should help unlock the credit markets. In what the Secretary of the Treasury is calling the Public-Private Investment Program for Legacy Assets, the government would allow private investors to bid on toxic assets, with backing from the government, thus establishing value and giving private investors the ability to potentially earn some profit in the long term. While this program has plenty of doubters, the market is glad to get some clarity on the proposal.

In a sign that the economy may improve, or more precisely that the rate of deterioration may moderate, wholesale inventories are beginning to decline. Many U.S. companies, after months of being overstocked, may be reducing inventories too much, offering hope that they will ramp up production later this year, providing improvement to the economy. To get to a point where growth returns, we need to see the credit markets loosen up and consumption needs to improve, quite a challenge given ongoing job losses.

Where we go from here is hard to say, but I do believe the bottom we hit on March 9 will hold. Given questions that remain surrounding unemployment, housing and corporate profits, among other things, it appears likely that we will stay in a bit of a sideways trading pattern for the near term.

Past performance is no guarantee of future results. The opinions expressed in this article are those of Mr. Herrmann and are current through April 14, 2009. Mr. Herrmann's views are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. Waddell & Reed Financial, Inc. is the ultimate parent company of Waddell & Reed, Inc. and of Ivy Funds Distributor, Inc.

The S&P 500 is an unmanaged index that tracks the stocks of 500 primarily large-cap U.S. companies. The MSCI EAFE Index is an unmanaged index comprised of securities that represent the securities market in Europe, Australasia and the Far East. It is not possible to invest directly in an index.