Federal Reserve Chairman Ben Bernanke did his best imitation of "SNL" character Debbie Downer Tuesday morning, driving stocks immediately lower before the market laughed him off. Bernanke delivered the Fed's semiannual monetary policy report to Congress, including his personal testimony to the Senate Banking Committee Tuesday morning. As you can see by the action of the SPDR S&P 500 (SPY), he had a significant impact.
Stocks had actually gapped open higher on hopes that Bernanke might speak of further quantitative easing or new mechanisms to spur employment and economic activity. The SPDR Dow Jones Industrial Average Index (DIA) and the PowerShares QQQ (QQQ) acted in concert with the SPY.
The Fed chief disappointed investors in his opening statements as he spoke of a likely slower rate of economic growth for the second quarter of 2012. The first reporting of second-quarter GDP is set for Friday of next week. He went on the discuss the stall in the labor market over the course of the second quarter, with an average increase of just 75,000 jobs through the last three months. He talked about still tight borrowing conditions for businesses and households, something Bank of America (BAC) may have something to say about Wednesday morning when it reports its earnings. He said the contribution of the housing market to the recovery was less than usual during these latest strange days. Still, the shares of the SPDR S&P Homebuilders (XHB) and major builders like Toll Brothers (TOL) rose on the day's news of improved builder confidence.
Reassuring his concerned national audience, Bernanke said headwinds should diminish over time, allowing the economy to grow somewhat more rapidly and the unemployment rate to decrease. However, he warned that, given that growth is projected to be less than satisfactory to draw many new entrants into the labor force, the recovery will be labored.
The Fed chief also spent a good deal of time warning Congress about the risk of pushing expiring fiscal legislation to its famous cliff's edge, now widely known as the "fiscal cliff." Just allowing the issue to stew could stall economic activity, as it restrains business plans for expansion. Then there's the risk of stirring the "sleeping dragon," Standard & Poor's (MHP) of the infamous downgrade of U.S. sovereign debt. To paraphrase, Standard & Poor's reasoning for its downgrade last time around, it was due to our government's inability to work responsibly for the better good. All these things work to destabilize the footing for stocks, and that's exactly what they did Tuesday morning.
After curiously being questioned about the Libor scandal, Bernanke answered the misplaced query with more concerning speak, saying he could not guarantee Libor pricing was reliable today. Barclays (BCS) and other global banks continue to be weighed by an ominous cloud that threatens to rain down expensive regulatory settlements and costs to the ongoing operations of banks.
Still, solid earnings reports from Coca-Cola (KO) and Goldman Sachs (GS) reassured a worried market. The Consumer Price Index (CPI), which was reported this morning, served to scare nobody, although we warned that inflation may return. The SPDR Gold Shares Trust (GLD) showed no fear of that, though, retreating a half point on the day. The iPath GSCI Crude Oil TR Index (OIL) gained 0.8% on the day, though, as the U.S. Navy fired on a threatening vessel in the Persian Gulf, killing one individual Monday. Integrated energy company, Exxon Mobil (XOM), was up 0.8% on the day in concert with oil.
Industrial Production growth was reported stronger than expected in June, up 0.4%, against economists' expectations for a 0.3% increase, based on Bloomberg's survey. However, the prior month decline was revised lower; that allowed the same level of activity as expected to result in a higher growth rate. Still, the market seemed to miss that point, driving the shares of industrials higher on the day, with the Industrial Select Sector SPDR (XLI) up 0.4%, and shares of General Electric (GE) and Caterpillar (CAT) up 0.7% and 0.9%, respectively.
On Wednesday morning, Chairman Bernanke will do it all over again, this time testifying before the House Financial Services Committee. The Fed remains ready to act, but the question is, can its bullets do any more damage. In conclusion, it may be exactly that potential damage that many market participants increasingly fear. Whether the Fed might do damage in the end if there are unintended consequences to its actions down the road (aka inflation) is a question gaining more volume as the days pass.