The confirmation of Ben Bernanke as President Bush's appointee to be the next Federal Reserve chairman helped major stock proxies rally Monday. The market's positive reaction reveals a bullish undertone, but it's still too early to tell whether this will be a lasting catalyst for the much-anticipated fourth-quarter rally. The Dow Jones Industrial Average surged 169.78 points, or 1.7%, to 10,385.00. The S&P 500 gained 19.79 points, or 1.7%, to 1199.38, and the Nasdaq Composite rose 33.62 points, or 1.6%, to 2115.83. Cantor Fitzgerald market strategist Marc Pado noted that the market was already moving up ahead of the Bernanke news, with the Dow gaining nearly 60 points even before rumors of the announcement surfaced. The move was in line with the uptrend seen Friday, which had lifted the broad averages, except for the Dow, which was sunk by Caterpillar ( CAT). But on Monday, Caterpillar and other economically sensitive components such as Alcoa ( AA), and DuPont ( DD) were lifting the blue-chip average. The key catalyst for the early gains in stocks was that Hurricane Wilma had veered away -- as expected -- from sensitive energy operations in the Gulf Coast. The price of crude oil continued to drop, losing 58 cents to $60.05 per barrel on Nymex, after trading below the key $60 level earlier in the session. But this time, energy shares didn't weigh on the broad indices, as they had last week. In fact, oil company shares surged prior to earnings reports from some of the sector's heavyweights such as Exxon Mobil ( XOM) later this week. The Amex Oil Index gained 3.0%. Last week's action was marked by sharp reversals, which is all part of establishing a base from which the market can move higher, from now until the end of November, says Cantor's Pado. But there's likely to be more resistance on the upside, he says. A lot of players have been hurt in the selling action that led the indices to five-month lows two weeks ago at around Dow 10,215, S&P 1177 and Nasdaq 2037.50. Many traders may be eager to sell into a rally as their positions get back to break-even.
The Bernanke announcement did spark newfound optimism on Wall Street, because it ends uncertainty about the succession of Fed Chairman Alan Greenspan, and Bernanke is a "known commodity," Pado says. But there was also optimism on the Street because many in the market tend to believe Bernanke is less dovish than Greenspan. "When you sum it up,
Bernanke is the best appointment for the stock market," says Ned Riley, chief investment officer at Riley Asset Management. "He is the most predictable and he is closely aligned with the president, which suggests an end to rate hikes sooner than later." For the long end of the bond market, however, that's not good news. The heightened inflation rhetoric by Fed officials in recent weeks had helped support longer-term dated securities, as these lose value over time as inflation rises. The benchmark 10-year Treasury bond fell 16/32 in price while its yield, which moves inversely, rose to 4.45%. The dollar, likewise, dropped after the Bernanke appointment. The greenback has been supported by the Fed's unwavering commitment to continue raising short-term rates since last year. This supports more attractive yields in short-term Treasuries and encourages foreign flows of money into the U.S. There was somewhat of a bounce in the dollar, however, as Bernanke promised to "maintain continuity with the policies and policy strategies under the Greenspan era." That promise may not be hard to fulfill at first for Bernanke, especially as Fed officials have signaled pretty clearly that they intend to continue raising rates at least until January. The market almost fully expects a rate hike next week, another one on Dec. 13, and yet another one in January, which would take the Fed funds rate to 4.50% before Greenspan rides off, according to Miller Tabak. Still, Bernanke is known for being one of the most vocal Fed governors when it came to warning about the possibility of deflation several years ago. He is also known to be an advocate of "inflation targetting," or setting a clear level for tolerable price increases, contrasting with Greenspan's more vague "risk-management" approach.
"Bernanke would show more inflation tolerance than Greenspan would," says John Lonski, senior economist at Moody's. "He's more likely to tell the story that a little bit of inflation is not necessarily bad for the economy." Contrary to Donald Kohn, who was reportedly Greenspan's preferred candidate to succeed him as Fed chairman, Bernanke also would start the job with the market not convinced that he is fully independent from the administration, says David Powell, currency analyst at IDEAGlobal. "Even before being appointed to be CEA chairman, which is far from a politically neutral appointment,
Bernanke was aligned with the Bush tax cuts," Powell says. "Bush, who often mentions loyalty, has confidence in him." Bush may have learned a lesson from the early 1990s, when Greenspan kept hiking interest rates during the re-election bid of his father, George H.W. Bush, a move some observers say may have cost Bush senior the presidency. The Bush administration is down in opinion polls recently, and congressional elections next year are looming. Amid current market fears that a tight monetary policy might provoke a recession, pressure is likely to be intense on the next Fed chairman.