Why Markets Move When Bernanke Says Nothing

Includes: DIA, QQQ, SPY
by: Investment U

By Jason Jenkins

The Dow Jones Industrial Average ended yet another volatile week with a strong gain Friday after Federal Reserve Chairman Ben Bernanke spoke at the annual economic conference in Jackson Hole. However, the question is “why?”

The Fed Chair did state that the United States was headed for long-term economic growth. It was the first winning week in a month. Yet there was no mention of any new monetary economic stimulus measures during his speech.

It was last year at this conference when he announced plans for QE2. Bernanke did leave wiggle room for the possibility of more monetary action if another recession seems inevitable.

There were no groundbreaking policy decisions declared. Bernanke specifically focused on the long-term strengths of the U.S. economy. He did not feel that the financial markets shocks since 2007 had permanently altered these strengths. And maybe it was that assertion of optimism that contributed to the end of the day upswing.

He went on to say our only real problem is a lack of confidence. In the American economy, the only thing that’s really lacking right now is confidence – but the ingredients for economic growth are present.

Still confidence has been hurt by a recession that was more severe than believed, as well as global in scope. Couple that premise with a historic financial market downturn and depressed housing market, and you have a slower than usual recovery.

A Real Message to Congress

As we have seen, the political circus of deficit reduction has been the one focal point of Congress this year. Bernanke warned that this obsession should not make lawmakers disregard the fragility of the current economic recovery.

This note should be taken into account in the Congressional Budget plan passed earlier in August where annual deficits are expected to be reduced by $3.3 trillion over the next 10 years solely through spending cuts.

The Fed chairman said long-term deficit reduction is necessary. But he said future economic health could be jeopardized if hiring and growth are not strengthened in the present. And the discussion just didn’t center on policies but also the policy-making process.

Bernanke was critical of Congress’ dysfunctional handling of the debt ceiling legislative process. The manner in which it was handled could be blamed for a disruption in the economy and future episodes that run this course could be similarly detrimental to recovery.

A Strong Warning for the Markets

The numbers out Friday morning highlighted just how precarious the U.S. economic recovery has become. The government reported that the nation’s economy grew at an annual rate of just one percent in the second quarter.

This was weaker than the government’s first estimate of 1.3 percent. The report fueled beliefs of a dreaded double-dip recession. The estimate for economic growth in the second quarter was lowered due to fewer exports and weaker growth in business stockpiles.

This translates into the U.S. economy only growing at an annual rate of .7 percent the first half of the year. This is the worst pace since the recession officially ended in June 2009.

You could say that all this information was known to the investor world. And as stated before, why did markets move if this was the case?

Simple. It was just set up for a bigger announcement to come in September.

I’ll explain tomorrow…

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