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Stocks look past economy to focus on Bernanke

The idea that the Fed chief might announce new stimulus efforts in a speech Friday appears to be enough to rally Wall Street. The Dow gains 322 and gold pulls back.

August 24, 2011|By Walter Hamilton, Los Angeles Times
  • Chairman of the Federal Reserve Ben Bernanke listens during a meeting at the Federal Reserve in Washington, DC.
Chairman of the Federal Reserve Ben Bernanke listens during a meeting at… (Jim Watson / AFP / Getty Images )

Wall Street appears to be betting on Ben Bernanke.

Despite another round of disappointing economic reports, the Dow Jones industrial average roared to its third-best day of the year. Investors clung to hopes that the Federal Reserve chairman might propose new measures to spark the torpid U.S. economy.

Even an earthquake on the East Coast couldn't rattle investors on Tuesday, when the blue-chip index surged more than 320 points. Another batch of downbeat reports on housing and manufacturing raised the prospect that Bernanke could announce new stimulus efforts in a highly anticipated speech Friday.

Though investors acknowledge that the Fed is limited in what it can do — both logistically and, to a certain degree, politically — they nonetheless expect Bernanke to build on the central-bank announcement two weeks ago to hold short-term interest rates near zero through at least the middle of 2013.

Bernanke is scheduled to address a gathering of Fed officials on Friday in Jackson Hole, Wyo.

At the Jackson Hole conference last year, Bernanke helped spark a stock market rally by signaling the central bank could deploy more stimulus measures to help the sputtering economy. Three months later, the Fed officially unveiled its second round of bond buying — so-called quantitative easing — referred to on Wall Street as QE2.

It is extremely doubtful that Bernanke will uncork QE3 on Friday, but investors are looking for calming words from the Fed chief after a torrent of political rancor out of Washington this summer that unsettled the markets.

"If you think about who has the calmest and most reassuring voice, it's always been Bernanke," said Marc Pado, U.S. market strategist at Cantor Fitzgerald. "There is a feeling that if there is one person who investors want to be coming out to say something to help the markets, he would be that guy."

Still, some market watchers worry that the expectation of Fed action could lead to disappointment.

"Investor expectations are so high now for some sort of Fed intervention that it seems that almost no matter what the Fed announces it can't possibly live up to the expectations," said John Bollinger, head of Bollinger Capital Management in Manhattan Beach.

On Tuesday the Dow jumped 322.11 points, or 3%, to 11,176.76.The Standard & Poor's 500 index rose 38.53 points, or 3.4%, to 1,162.35. The Nasdaq composite surged 100.68 points, or 4.3%, to 2,446.06.

Energy was the best-performing sector in the S&P 500, rising 4.6% on average.

Despite increasing signs that Libyan rebels were headed for victory, which could result in a resumption of oil production from the North African country, U.S. crude prices rose. Near-term futures in New York jumped $1.02 to $85.44 a barrel.

In the Treasury bond market, the government sold $35 billion in two-year notes at a record-low yield of 0.22%. The 10-year note's yield rose to 2.16% from 2.11% on Monday.

In a sign of investors' fledgling willingness to take risk, gold backed off after a stunning six-day rally that had carried the precious metal to new highs. Near-term futures in New York fell $30.40, or 1.6%, to $1,858.30 an ounce in the regular trading session, then slid to $1,835 in electronic trading. The price had reached $1,917.90 on Monday.

Stocks rallied despite some disappointing economic news.

Sales of new homes fell for the third month in a row, to the lowest level since February. Also, a regional manufacturing survey released by the Federal Reserve Bank of Richmond showed a sharp drop in activity, reinforcing a similar finding out of Philadelphia last week.

The market rally continued a pattern this month in which enormous drops in stock prices are followed within days by powerful but smaller jumps as investors sift through beaten-down shares.

Investors voiced doubt that the rally signaled a lasting turnaround in the market.

"It was a relief rally more than it is a rally of conviction," Pado said. "A bounce is not going to pick us up to new highs."

walter.hamilton@latimes.com

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