Markets snapped a three-day losing streak on Wednesday, as investors were boosted by Germany’s support for the euro-zone bailout and eagerly await President Barack Obama’s new job plans. Additionally, the Federal Reserve's Beige Book reported an improvement in economic activity which comes as welcome news amidst the gloom and helped the three benchmarks to gain over 2%.
The benchmarks enjoyed their first positive session of trading in September yesterday. The Dow Jones Industrial Average (DJIA) leapt a substantive 275 points or 2.5% to close at 11,414.86. The Standard & Poor 500 (S&P 500) was up 2.9% to settle at 1,198.62. The Nasdaq Composite Index gained 3.0% to close at 2,548.94. The fear-gauge CBOE Volatility Index (VIX) plunged 9.6% yesterday and reflected partial deflation of investor anxiety. However, the fear-gauge index still hovers over 30, which is a key indicator of heightened fears in the markets. On the New York Stock Exchange, Amex and Nasdaq, consolidated volumes were 7 billion shares, lower than last year's average of 7.56 billion. On the NYSE, 88% of the stocks settled for the green.
It was hopes of another economic stimulus package that had led the markets higher ahead of Federal Reserve Chairman Ben Bernanke’s speech at Jackson Hole on August 26. Though he stopped short of announcing the third round of quantitative easing during his speech, investors gained fresh hope that the monetary policy may be announced in September, as Bernanke announced: “The Fed has a range of tools that could be used to provide additional monetary stimulus.
The major catalyst for the benchmarks’ uptrend yesterday was once again ‘hope’. With Obama expected to announce the package in front of Congress at 7 P.M., it is being speculated that a $300 billion package will have to deal with tax cuts, infrastructure spending and local government aid.
The package is being perceived as a key measure to boost the jobs market, which had been a serious impediment till now for the economy recovery. For the last few months, jobs data has painted a gloomy picture on most occasions, depicting momentum only in patches. Only recently, the economy was in for a rude shock when the U.S. Bureau of Labor Statistics reported zero jobs additions to nonfarm payroll employment in August.
However, the Federal Reserve's Beige Book boosted market sentiment, reporting a modest improvement in economic activity. According to the Beige Book: “Reports from the twelve Federal Reserve Districts indicated that economic activity continued to expand at a modest pace, though some Districts noted mixed or weakening activity. The St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco Districts all reported either modest or slight expansion. Atlanta said activity continued to expand at a very subdued pace, while Cleveland reported slow growth and New York indicated growth remained sluggish. Economic activity expanded more slowly in the Chicago District and slowed in the Richmond District. Business activity in the Boston and Philadelphia Districts was characterized as mixed, with Philadelphia adding that activity was somewhat weaker overall. The Beige Book also reported modest improvement in consumer spending in most of the Districts since the last survey.
News from the other side of the Atlantic also provided significant momentum to the markets, as Germany stepped in to soothe debt-fears. European debt-concerns have been a constant laggard for the US markets, providing temporary respite as and when euro-zone countries have found ways to deal with lingering debt concerns. Yesterday, it was the ruling from the German court that paved the way for the country’s participation in the bailout plan for its troubled neighboring countries.
Following the course of events through the day, the banking sector ended up on the winning side after its shares posted big gains. Among the gainers were Bank of America Corporation (NYSE:BAC), The Goldman Sachs Group, Inc. (NYSE:GS), Morgan Stanley (NYSE:MS), JPMorgan Chase & Co. (NYSE:JPM), Citigroup, Inc. (NYSE:C), Wells Fargo & Company (NYSE:WFC) and U.S. Bancorp (NYSE:USB) and they were up 7.0%, 3.6%, 6.5%, 4.1%, 4.6%, 4.4% and 6.7%, respectively.