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The key speech by Federal Reserve Chairman Ben Bernanke brought cheer to the markets on Friday. Bernanke assured investors of policy action by the central bank. However, the central bank is not jumping into action right now, and that somewhat limited the gains. Economists were also unsure if the central bank would implement these economic measures when policy makers meet later in September. Separately, economic readings on the domestic front were encouraging.
The Dow Jones Industrial Average (DJI) had gained 151 points during the session, but receded somewhat to end 90.13 points or 0.7% higher at 13,090.84. The Standard & Poor 500 (S&P 500) gained 0.5% and finished Friday’s trading session at 1,406.58. The tech-laden Nasdaq Composite Index added 0.65 and closed at 3,066.96. The fear-gauge CBOE Volatility Index (VIX) dropped 2.0% and settled at 17.47. Consolidated volumes on the New York Stock Exchange, Nasdaq and American Stock Exchange were roughly 5.3 billion shares, lower than the year-on-year average of 6.6 billion shares. Advancing shares enjoyed a better run over declining stocks on the NYSE; as for 67% stocks that gained, 28% stocks closed lower.
Through the week, volumes remained at record lows as investors awaited Bernanke’s speech on Friday. In fact, investors’ wait-and-watch attitude, since they were awaiting actions by central banks, including U.S. Europe and even China, combined with the summer holidays kept volumes sharply lower through August. Wall Street Journal’s data noted that the average daily volume in August was 3 billion on NYSE; the lowest level since May 2007. As for the Nasdaq, the average volume was at the lowest level since August 2005 at 1.54 billion shares. However, low volumes did not stop the benchmarks from logging monthly gains, the third straight monthly set of gains. In August, the Dow, S&P 500 and Nasdaq added 0.6%, 2% and 4.3%, respectively.
Coming back to Friday’s developments, while all eyes were fixed on what Bernanke had to say regarding the economic stimulus, his speech was mostly in line with expectations. Hopes had been initially high that Bernanke may boost economic measures. However, strategists had later opined otherwise taking a cue from recent encouraging economic readings. Housing figures were positive and GDP data showed a slight advance in the second estimate from the initial estimate.
In fact, Zacks had said ahead of Bernanke’s speech that while the central bank head will refrain from making any definite commitments, he would assess present economic conditions. That was largely what happened as Bernanke spoke about his “grave concern” in the domestic labor market and he did hint at economic measures but not just yet. In his speech at Jackson Hole, Wyoming, Bernanke said: “The stagnation of the labour market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years”.
As for additional economic measures, he said: “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability”.
Bernanke’s speech comes two weeks ahead of the Federal Open Market Committee’s (FOMC) meeting. However, the Street is not too optimistic about the FOMC meeting announcing the implementation of the third round of quantitative easing policy.
Separately, economic readings were on the brighter side on Friday with factory orders and consumer sentiment both rising. As for factory orders, U.S. Census Bureau reported that new orders for manufactured goods rose 2.8% to $478.6 billion in July. This was well ahead of e consensus estimates that projected a 1.6% increase. Meanwhile, the Thomson Reuters/University of Michigan final sentiment index was up to its best level in three months. The index increased to 74.3 in August from 72.3 in July. This was also ahead of consensus estimates of 73.5.
Coming to the individual sectors, materials and energy sector were the biggest winners among S&P’s 10 industry groups. The Materials Select Sector SPDR (XLB) gained almost 1.0% and stocks including Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), Southern Copper Corp (NYSE:SCCO), Vale SA (ADR) (NYSE:VALE) and Mosaic Co (NYSE:MOS) gained 4.1%, 1.6%, 2.1% and 2.0%, respectively. As for the energy sector, Energy Select Sector SPDR (XLE) was up 1.0% and stocks such as Western Refining, Inc. (NYSE:WNR), Valero Energy Corporation (NYSE:VLO), Marathon Petroleum Corp (NYSE:MPC) and Chevron Corporation (NYSE:CVX) gained 1.6%, 1.7%, 1.9% and 1.1%, respectively.