US stocks surged, reversing a 221-point loss in the Dow Jones Industrial Average, as Federal Reserve Chairman Ben S Bernanke indicated the economy isn’t deteriorating enough to warrant any immediate stimulus. treasuries trimmed gains and the dollar swung to a loss.
The Standard & Poor’s (S&P) 500 Index added 1.5 per cent at 12.06 pm in New York after losing as much as two per cent. The Stoxx Europe 600 Index lost 0.7 per cent, trimming its retreat from 2.7 per cent. Yields on Treasury 10-year notes slipped two basis points to 2.21 per cent after decreasing 11 points. The Dollar Index lost 0.6 per cent after climbing 0.3 per cent. Crude slipped 0.3 per cent following a 2.8 per cent retreat.
Markets gyrated following the Bernanke speech, in which he said the central bank still has tools to stimulate the economy without signaling he will use them. He echoed comments from dissenting members of the Federal Open Market Committee (FOMC) who said data aren’t pointing to a recession. Investors piled into US equities trading at the cheapest valuations since 2009.
“If they can stick to this and let the market find its own bottom, they will come out of this stronger,” James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $340 billion, said in a telephone interview. “People will start to develop some confidence that this thing can recover on its own without Fed assistance.”
Stocks initially fell after Bernanke announced no new plan to stimulate growth. He foreshadowed a $600 billion bond- purchase program a year ago at the same event in Jackson Hole, Wyoming, helping to stoke a 30 per cent surge in the S&P 500 through April 29. The measure has retreated more than 15 per cent since that peak amid concern the economy is stalling.
The commerce department said on Friday that US gross domestic product expanded at a one per cent annual rate in the second quarter, less than the median economist forecast, which called for a 1.1 per cent expansion.
“Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years,” Bernanke said in prepared comments. “It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.”
This year’s decline in the S&P 500 left the benchmark gauge for American equities trading at 12.7 times reported earnings as of yesterday, more than 20 per cent below its five-decade average. Barton Biggs, founder of hedge fund Traxis Partners LP, said last week that valuations are so low they could withstand a 15 per cent decline in profits.
PROFIT FORECASTS
Earnings for companies in the index may rise 18 per cent this year, according to the average estimate of analysts surveyed by Bloomberg. Economists predict gross domestic product will expand 1.75 per cent this year and 2.35 per cent in 2012, according to a survey of 56 respondents conducted by Bloomberg.
Threats facing the economy aren’t as grave as they were when Bernanke pledged new stimulus at Jackson Hole in August 2010, according to Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock Inc. Solutions such as the so-called quantitative easing program to purchase treasury notes may be less effective now, said Koesterich, whose firm oversees $3.66 trillion.
“This is pretty much what we expected,” he said. “The economic data points are likely going to continue to be weak, but the market already knows that. If you have period when economic data is poor, but not as bad as people expect, you can actually see some relief in the market.”
RISING PRICES
Rising consumer prices and signs the economy is still growing may be restricting Bernanke’s options. Gasoline costs are about 30 per cent higher, consumer inflation is twice as fast and inflation expectations are above levels since Bernanke signaled more easing a year ago. While the US expansion has slowed, the Chicago Fed’s index of 85 economic indicators improved in July for a third month on gains in production.
The threat of deflation has subsided, with the labour department’s consumer price index, minus food and energy, rising 1.8 per cent for the 12 months ending July. It increased at a 0.9 per cent 12-month rate in July 2010 before Bernanke’s Jackson Hole speech last year.
A measure of inflation expectations watched by the Fed is showing that traders see annual price increases of 2.77 per cent starting in five years, compared with 2.22 per cent a year ago.
PLOSSER, FISHER
Fed bank presidents Charles Plosser of Philadelphia, Richard Fisher of Dallas and Narayana Kocherlakota of Minneapolis voted against the Fed’s decision to keep the target for the federal funds rate at zero to 0.25 per cent until at least mid-2013. Plosser and Fisher said last week the pledge won’t help spur growth. The last time three policy makers dissented was in November 1992.
“Our problems are not problems easily addressed by monetary policy,” Plosser said in an August 17 interview, adding that the Fed is “risking its credibility because it’s doing things that don’t work.”
Policy makers this month pledged to keep their benchmark interest rate near zero until at least mid-2013 and said they “discussed the range of policy tools” available, signaling they may add to their record stimulus.
Bernanke told Congress on July 13 the Fed has stimulus options. They may include buying additional securities, increasing the average maturity of its bond portfolio, lowering the interest rate on excess reserves and pledging to keep its balance sheet near a record high for a longer period of time.
Morgan Stanley analysts have cut their estimate for expansion worldwide this year to 3.9 per cent from a previous prediction of 4.2 per cent. Part of the reason was “the drama” around lifting the US debt ceiling, which helped depress financial markets and erode business and consumer confidence, the analysts said in a report last week.
President Barack Obama signed a plan to raise the federal debt limit on August 2, the deadline to avoid a possible default, after months of wrangling with Congress. The deal would make $2.4 trillion in deficit cuts over 10 years.
