Stocks Close Up After Bernanke's Testimony, Earnings Reports

By Emma L. Carew
Washington Post Staff Writer
Tuesday, July 21, 2009; 6:08 PM

Stocks extended their winning streak Tuesday after Federal Reserve Chairman Ben S. Bernanke told lawmakers that the economy appeared to be stabilizing and major companies posted better-than-expected quarterly results.

The Dow Jones industrial average rose 67.79 points, or 0.8 percent, to 8915.94, while the broader Standard & Poor's 500-stock index inched up 3.45 points or 0.4 percent, to 954.58. The tech-heavy Nasdaq Composite index gained 6.91 points, or 0.4 percent, to close at 1916.20 after being down for most of the day.

During testimony before the House Financial Services Committee, Bernanke argued against a House proposal that would allow the Government Accountability Office to audit the Fed's execution of monetary policy. "A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability," he said.

Monetary policy will tighten, he said, only when unemployment rates decline and the economy stabilizes, which the Fed has forecast to happen in late 2010 and 2011.

"Mr. Bernanke is of the view that because the unemployment rate has risen so high in this cycle, policymakers will have plenty of time to respond to the eventual turn," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics, in a research note.

Bernanke's testimony didn't shake up the markets too much, said Peter Cardillo, chief market economist for New York-based Avalon Partners. Many of his main points, about unemployment staying high and the economy starting to turn around, have been made before.

"It was all about earnings," Cardillo said. "And the market managed to overcome some earlier selling pressures."

Investors were encouraged by upbeat second-quarter results from several key industry players, including construction equipment giant Caterpillar. The Peoria-based manufacturer said its second-quarter profit fell to $371 million from $1.11 billion in the comparable period a year earlier, as sales fell 41 percent, to $7.98 billion, because of the global downturn.

But the results exceeded the expectations of many analysts, and Caterpillar raised its profit outlook for the rest of the year. The company's shares jumped $2.81, or 7.7 percent, to $39.46.

Merck was another company that surpassed lower Wall Street estimates. The pharmaceutical giant said it earned $1.56 million, down from $1.77 million in the second quarter of 2008. Sales fell 3 percent to $5.9 billion. Merck's stock jumped 6.1 percent to close at $29.65

"So far, second quarter earnings season has proven to be a net positive for stocks and as a result the broad market index has rallied back towards its late-June intraday high of 956," Steven Ricchiuto, chief economist for Mizuho Securities USA Inc., wrote in a research note Tuesday morning.

Bethesda-based defense contractor Lockheed Martin said that its second-quarter profit fell 17 percent, to $734 million, or $1.88 per share, for the second quarter, from $882 million, or $2.15 a share, in the comparable period a year earlier. Revenue slid 2 percent, to $11.24 billion.

Lockheed attributed the decline to rising pension costs. The results exceeded analysts forecasts for both revenue and profit, but the company's shares fell $6.98, or 8.5 percent, to $75.13 after the Senate voted to cut off spending for Lockheed's F-22 jet fighter program.

"Most of the earnings that are coming in are not due to revenue growth, but rather due to cost cutting effects," said Cardillo. "Eventually those cost cutting effects will mean higher earnings going forward, obviously beneficial to the economy."

Crude oil rose 74 cents to settle at $64.72 a barrel on the New York Mercantile Exchange.

Overseas stocks also were up. London's FTSE gained 0.9 percent, while the Dax in Germany was up 1.3 percent. Japan's Nikkei climbed 2.7 percent.

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