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Raucous Week on Wall Street: Europe, Bernanke Lead the Way

A strong February market has much work to do in March

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The Equation That’s Been Driving the Market

The other big news this week was the Congressional testimony from Ben Bernanke. The Fed Chairman’s semi-annual testimony used to be a big deal, but since Bernanke allowed at least a little more transparency into a hopelessly opaque institution, the thoughts of Mr. Bernanke aren’t wholly unexpected.

In short, Bernanke said that the economy hit a rough patch late last year but that things are looking better at the start of this year. The part of Bernanke’s remarks that caught my attention was his robust defense of the Fed’s asset purchases. Some folks on Wall Street thought the recent Fed minutes indicated that the central bank was ready to pull the plug on their bond-buying. That ain’t happening. Bernanke made it clear that they want to keep buying bonds until the labor market gets much better. The Bearded One said, “The FOMC has indicated that it will continue purchases until it observes a substantial improvement in the outlook for the labor market in a context of price stability.” Seems pretty clear to me.

Now let me circle back and explain why this is so important. I’ll give you the simple equation to understand the stock market for the last six months or so. The areas that have done exceptionally well are found wherever you see consumers intersecting finance. This is absolutely crucial.

What do I mean by this? It’s not just that consumers are buying more things; it’s that they also need to finance those purchases. That means housing, which has done extremely well. The Homebuilder ETF (NYSE:HXB) is up 41% in the last year.

That means cars. Ford (NYSE:F) has rallied more than 36% in the last seven months. Nicholas Financial (NASDAQ:NICK) continues to thrive as well. It also means travel and airline stocks. And spillover industries. Home Depot (NYSE:HD) just reported very good earnings, plus they raised their dividend by 34%. People buying. People borrowing. Banks lending.

On the other side of the financing, the big banks have done well. This has been great for JPMorgan (NYSE:JPM) and Wells Fargo (NYSE:WFC), both of whom made a conscious decision to focus on mortgages. Stocks like Visa (NYSE:V) and MasterCard (NSYE:MA) have also been big winners. All of these stocks have benefited from the same effect: Consumers buying things with money they don’t have at the moment but plan to get soon.

This is why Bernanke’s defense of QE, and his dismissal of its risks, is so important. This trend isn’t nearly over, either. Mortgage rates are still very low, and housing inventory is getting pretty thin as well. Monetary policy does eventually work, though it may tarry.

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