Here’s How Economic Reports Upstaged Bernanke

New stock market records were set on Thursday as the Dow, S&P 500, and Russell 2000 indices set the bar higher.

Ben Bernanke must have been relieved that his testimony before the Senate Banking Committee was upstaged by some great economic reports. The economic recovery has passed the point where the Fed’s pronouncements meant everything to stock market performance while the economic data had little or no impact. Few commentators seemed to notice that the Chairman made an important distinction between the Fed’s use of its asset purchase program as opposed to the near-zero interest rate policy, as tools in its intervention efforts. As the text of Dr. Bernanke’s prepared testimony noted:

“The Committee has said it intends to maintain a high degree of monetary accommodation for a considerable time after the asset purchase program ends and the economic recovery strengthens.”

Most people mistakenly interpret the Fed’s efforts at maintaining “a high degree of monetary accommodation for a considerable time” to include the asset purchase program. Such is not the case and the Chairman emphasized that on Thursday.

Apparently, the distinction between the near-zero fed funds rate and the soon-to-be-tapered bond-buying program was overlooked as investors were spellbound by the Philadelphia Fed’s Business Outlook Survey for June. Although economists were expecting a decline in the survey’s headline diffusion index to 9.0 from May’s 12.5, the index skyrocketed to 19.8 — its highest reading since March of 2011.

The U.S. Department of Labor also brought good news to the stock market on Thursday, as its weekly report on initial unemployment claims indicated a decline to 334,000 new claims, beating economists’ expectations for a less-significant decline to 345,000 initial claims.

Victories on the earnings reporting front were scored by Morgan Stanley (NYSE:MS) which saw its share price pop 4.37 percent on the news and by IBM, which enjoyed a 1.77 percent surge on its earnings beat.

The Dow Jones Industrial Average (NYSEARCA:DIA) gained 78 points to finish Thursday’s trading session at a new record-high closing level of 15,548.54 for a 0.50 percent advance. The S&P 500 (NYSEARCA:SPY) also rose 0.50 percent to a new record-high of 1,689.37 after beating its intraday record of 1,687.18, which was set on May 22. Although the Nasdaq Composite made a 0.04 percent advance to 3,611, the Nasdaq 100 (NASDAQ:QQQ) was the day’s big loser, falling 0.24 percent to finish at 3,077 as a result of earnings shortfalls by Intel (NASDAQ:INTC) and eBay (NASDAQ:EBAY). The Russell 2000 (NYSEARCA:IWM) surged 0.74 percent to end the day at a new record-high close of 1,050.27.

In other major markets, oil (NYSEARCA:USO) jumped 1.43 percent to close at $38.34. On London’s ICE Futures Europe Exchange, September futures for Brent crude oil advanced by 22 cents (0.20 percent) to $108.83/bbl. (NYSEARCA:BNO).

August Gold Futures declined by $1.00 (0.08 percent) to $1,283.20 per ounce (NYSEARCA:GLD). Transports bolted from Area 51 on Thursday, with the Dow Jones Transportation Average (NYSEARCA:IYT) accelerating 1.70 percent.

In Japan, stocks advanced as the yen became the yenny again, weakening to 100.18 per dollar during Thursday’s trading session in Tokyo. A weaker yen causes Japanese exports to be more competitively priced in foreign markets (NYSEARCA:FXY). Thursday’s big gainers were software developer KLab, which saw its share price skyrocket 24 percent and Toshiba, which enjoyed a 2.3 percent surge. The Nikkei 225 Stock Average jumped 1.32 percent to 14,808 (NYSEARCA:EWJ).

Stocks sank in China, after a report from the Xinhua News Agency revealed that the government is considering an increase in the tax on real estate purchases. The Shanghai Composite Index fell 1.05 percent to close at 2,023 (NYSEARCA:FXI). Hong Kong’s Hang Seng Index declined 0.12 percent to finish the session at 21,345 (NYSEARCA:EWH).

European stocks continued their advance on Thursday, based on old-fashioned earnings reports. All of the major European Stock Indices managed to climb higher as strong earnings were reported across a number of sectors. Better-than-expected quarterly earnings reports from the financial sector outweighed the disappointing reports from telephone manufacturers Ericsson (NASDAQ:ERIC) and Nokia (NYSE:NOK).

The European Central Bank’s decision to lower the risk premium on asset-backed securities from 16 percent to 10 percent was not considered to be a factor in Thursday’s advance by the financial sector.

The Euro STOXX 50 Index finished Thursday’s session with a 1.35 percent jump to 2,717 — finally rising above its 50-day moving average of 2,700. Its Relative Strength Index is 58.06 (NYSEARCA:FEZ).

Technical indicators reveal that the S&P 500 remained above its 50-day moving average of 1,638 after finishing Thursday’s session with a 0.50 percent advance to its latest record-high close of 1,689.37. At this point, bears are hoping to see the formation of a head-and-shoulders pattern. Its Relative Strength Index rose from 65.43 to 67.56. Both the MACD and the signal line continue to rise above the zero line, suggesting an advance.

 

For Thursday, all sectors were in positive territory, except for the technology sector, which declined 0.25 percent. The financial sector led the group, with a gain of 1.35 percent.

Consumer Discretionary (NYSEARCA:XLY): +0.57 percent
Technology (NYSEARCA:XLK): -0.25 percent
Industrials (NYSEARCA:XLI): +1.01 percent
Materials (NYSEARCA:XLB): +0.05 percent
Energy (NYSEARCA:XLE): +1.06 percent
Financials (NYSEARCA:XLF): +1.35 percent
Utilities (NYSEARCA:XLU): +0.87 percent
Health Care (NYSEARCA:XLV): +0.28 percent
Consumer Staples (NYSEARCA:XLP): +0.34 percent

Bottom line: As the stock market resumes its business of hitting new record high closing levels, the Federal Reserve will obviously be weighing investors’ increased appetite for risk as a significant factor in its decision as to when to begin cutting back on its bond-buying program. Thursday’s economic reports — especially the better-than-expected decline in unemployment claims — must have been on Ben Bernanke’s mind as he reminded the Senate Banking Committee that the taper will end long before the near-zero federal funds rate gets increased.

John Nyaradi is the author of The ETF Investing Premium Newsletter.

Don’t Miss: High Mortgage Rates? Hedge Fund Manager Still Says ‘Buy a Home’.