Why Is Ben Bernanke Getting Credit for Monday’s Rally?

by James Brumley | March 27, 2012 11:25 am

On Monday, stocks soared, gaining more than 1% — reportedly thanks to some encouraging from Federal Reserve Chairman Ben Bernanke. Was he really the reason for the bullishness? Or is he just a high-profile name that gets an inordinate amount of credit — good and bad — for pushing stocks around?

Oh, the logic makes sense. He holds more financial cards than anyone else in the free world. When every word that comes out of his mouth allegedly moves the market, though, it might be time to stop worrying about him so much.

That said, there’s still a valuable data nugget that pops up from his reported role in the cause/effect relationship. But first things first.

And That’s New Because?

News flash: Although the job market is technically improving, it’s still weak in the grand scheme of things. Therefore, Bernanke’s action plan is to maintain an accommodative (read: “low interest rate”) economic policy until things get much healthier.

On the surface and by itself, it’s bullish. Problem is, it’s not news — the current economic state, as well as the Fed’s current economic policy, have been in place since 2010.

So how come the market went hog-wild when Bernanke reiterated what already was widely known in his speech at an Arlington, Va., conference yesterday? Because that’s what traders, as a collective, do. It might not be rational or logical, but it’s still a reality. And it’s more fruitful to trade what the market is doing rather than trade what you think it should be doing. If his comments drive the market higher — even for no reason — then the “trade of the day” is indeed a bullish one.

Just don’t get married to the trend — particularly if it stems from something Ben Bernanke said.

Apparently Nothing Else Matters

Most investors know the Fed Chairman’s comments can occasionally move the market. But most investors might not realize how much credence the man gets. Take a look at some headlines naming Bernanke as the reason for major movement from the market in just the last few weeks:

And these are just a smattering of examples. He gets the blame/credit for something at least two or three times per week.

What’s really interesting is how the same message from Bernanke can have different effects, depending on the time of the message, and the context in which it is delivered. Even more interesting is how even a non-action like the mixed results from Feb. 2 is pinned on Bernanke — stocks went nowhere because of what Bernanke said? C’mon, now you’re just grasping at straws.

Just for the sake of argument, a question: Is it possible the market is simply going to do what the market is going to do, and as long as what the Fed chairman says at least somewhat jives with the trend du jour, he’s determined to be the cause? So be it if that’s the case, but if that is indeed the case, as investors we might as well tune out everything else and just start watching BenTV, 24 hours a day, seven days a week.

Fortunately, most investors innately know there’s more to this game than just Bernanke, even if the media continually implies there isn’t.

On the Other Hand

All that being said, there is some value in keeping tabs on Ben Bernanke’s comments. Actually, it’s not so much his words that are important, but the market’s reaction to them.

Let’s face it. Anything Bernanke says can be interpreted in several ways. Take for instance yesterday’s comments. The job market still is tepid, so the Fed is going to remain dovish. That accommodative policy is good for stocks. Let’s not forget, though, he’s being accommodative because the economy is soft. A soft economy is bad for stocks. In fact, the same policy was just as apt to spook investors as it was to please them back in 2009 and 2010. Point being, there are two sides to every coin.

The value, then, is in the reaction to Bernanke’s words — it’s a glimpse into how the market is thinking. It’s pretty clear from watching the post-Bernanke response over the past several weeks that investors want to be bulls; they’re looking for a reason to be bullish. We really don’t have to be worried until stocks start to tumble on what should be good news.

Source URL: http://investorplace.com/2012/03/why-is-fed-chairman-ben-bernanke-getting-credit-for-monday-rally/
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