Bernanke Remarks Boost Markets
Wednesday, February 25, 2009
Federal Reserve Chairman Ben S. Bernanke sparked a robust stock market rally yesterday by signaling that the recession could end this year and that banks might not need to be nationalized as part of the government's recovery efforts.
Both the blue chip Dow Jones industrial average and the Standard & Poor's 500-stock index regained much of -- or more than -- what they lost Monday when both indicators plummeted to levels not seen in more than a decade.
Tuesday's afternoon surge came despite two reports earlier in the day indicating that home prices and Americans' confidence in the economy had plummeted.
The Dow closed up 3.3 percent, or 236.16 points, at 7350.94. The S&P 500 climbed 4 percent, or 29.81 points, to 773.14. The tech-heavy Nasdaq composite index gained 3.9 percent, or 54.11 points, to close at 1441.83.
In his testimony before the Senate Banking Committee, Bernanke said that the U.S. recession could end in 2009, paving the way for a "year of recovery" in 2010, if the government's actions to bolster the financial sector are effective. The chairman also told Congress that major banks do not need to be nationalized as part of the government's financial rescue plan.
On Monday, the Obama administration outlined a change in its policy -- which would allow banks to repay the government with common stock rather than cash. The administration said the move was intended to give the firms more capital to withstand a continued deterioration of the economy, and not to nationalize the banking system. The government could end up taking large stakes in some financial institutions.
Wall Street analysts and traders said the Fed chief's comments yesterday calmed investors' worries about the future of banks. Investors last week sold off bank shares in fear that nationalization would wipe out equity holders. Yesterday, financial shares came roaring back with the S&P 500 financial sector surging 11.8 percent.
But Wall Street analysts cautioned that the rally might be short-lived.
"I think the market was just primed to respond to something good because it had been beaten up for the last couple of weeks," said Philip J. Roth, chief technical market analyst for Miller Tabak in New York.
Robert Pavlik, chief market strategist for Banyan Partners, credited Bernanke, but added that the markets were unlikely to see a long-term recovery until investors regained confidence in the economy.
Bank of America and Citigroup, both recipients of federal aid, rose about 21 percent. J.P. Morgan Chase gained 7.7 percent. Shares of retailers Home Depot, Macy's and Nordstrom also advanced after the companies reported financial results that beat analysts' expectations. Shares of General Motors closed up more than 25 percent.
Wall Street rallied even as fresh data showed the housing market, which has been at the center of the financial meltdown, is still troubled. Home prices fell by a record 18.2 percent in the fourth quarter, compared with a year ago, according to the Standard & Poor's/Case-Shiller U.S. National Home Price index. It was the steepest decline in the 21-year history of the index.