During the question-and-answer period of Ben Bernanke's testimony before Congress on Wednesday, Sen. Jim Bunning (R., Ky.) accused the Fed chairman of general incompetence and of leading the stock market into the basement. But Bunning must have overlooked Bernanke's hand in spurring some huge stock market rallies over the last month.Wednesday marked the third such occurrence, as the Dow Jones Industrial Average jumped back above its 200-day moving average, gained 210 points, or 1.9%, and closed at 11,009.26 in the wake of Bernanke's testimony. The S&P 500 added 1.8% to 1259.43, and the Nasdaq Composite climbed 1.8% to close at 2079.50. Altria ( MO) was the only Dow component to end in the red, with Boeing ( BA), Home Depot ( HD) and JPMorgan Chase ( JPM) at the vanguard of the advance, the latter after posting strong quarterly results. Treasury prices and gold also rallied sharply while the dollar stumbled. Bunning may be at the extreme -- he opposed Bernanke's nomination in the first place. But the financial markets haven't exactly given the chairman high marks since he took office, either. Bernanke's
The failure to extend the June rally was hugely disappointing to traders, says John Bollinger, president of Bollinger Capital, and the market sank into negative sentiment territory. "The bears were crowing at maximum volume," a sign the market was "well set up to receive some good news" Wednesday, he says. Indeed, the market's were set up to receive mixed news as neither higher-than-expected CPI data, weaker-than-expected housing starts nor some warnings about inflation from Bernanke could keep major averages from their appointment with higher prices. Up volume was just shy of 90% on the NYSE, where 2.7 billion shares traded, but 75% of Nasdaq trading, where 2.3 billion shares changed hands. Still, the big upside action means "the bulls have the ball for the third time, and it is fourth and goal," says Bollinger. Translation: Another failure to extend a rally on the back of these bullish days could suggest an ugly fate for the stock market.
Traders read Bernanke's testimony as a dovish confirmation of the June 29 FOMC statement. Bernanke repeated that slowing growth would weaken inflation, and that monetary policy must be based on "the longer-term outlook for both inflation and economic growth." Regardless of the Fed's blue-sky-no-clouds forecast, Bernanke didn't telegraph a pause in August. Indeed, he devoted much time in his testimony and in the Q&A to inflation -- repeating that inflation is the greatest current threat to the economy. His comments were peppered with hawkish statements, such as: "We have to take into account the risks as well as the expected path ... the chance a bad outcome could occur," adding, "You need to lean a bit against that bad outcome." Bernanke defensively answered comments about mortgage rates rising and the weak stock market by noting that both markets do much worse in inflationary periods. In the testimony, he said "some inflation risks remain," and they are largely centered around unpredictable prices for energy and other commodities. "If the pattern of elevated readings on inflation is more protracted or more intense than is currently expected, this higher level of inflation could become embedded in the public's inflation expectations and in price-setting behavior." At best, Bernanke gave himself the flexibility to pause if economic data surprises to the downside, and the credibility to hike again if inflation continues to edge upward. Bernanke said he's "very aware" of concerns about overshooting, but said the situation of addressing higher or more persistent inflation later means "perhaps more interest rate increases. We have to balance those risks in two directions." Bernanke said that at some point the "Fed will have to get off of this 25-basis-point escalator." Other markets reacted similarly to stocks. Treasury bonds rallied sharply as the 10-year gained 19/32 to yield 5.05%. The dollar sank 0.38% on the news to 116.75 yen from above 117 Tuesday, and the euro gained 0.74% to $1.2602. Only time will tell if Bernanke and the market's relationship has grown closer. If not, investors will once again be all dressed up with nowhere to go.