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Investors cheer Fed’s new tone Add to ...

With the Fed providing support, what’s not to like about the stock market right now?

In early trading on Thursday, the S&P 500 rose as high as 1,671, up about 18 points, putting it on track for a record-high close. It has rebounded some 6 per cent since June 24.

The rally was also global: Canada’s S&P/TSX composite index rose 117 points, to 12,424. In Europe, Germany’s DAX index rose 0.9 per cent and the U.K.’s FTSE 100 rose 0.5 per cent. Stocks moved higher in Asia, too.

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For the most part, stocks have been performing well over the past two weeks, but Thursday’s gains mark an interesting shift. In a speech on Wednesday evening, Ben Bernanke sounded remarkably dovish on monetary policy, noting that the unemployment rate is high and inflation too low.

“Highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy,” he said, according to Bloomberg News.

That seems to be assuaging concerns, raised in June, that the Fed is close to winding down its bond-buying program, known as quantitative easing or QE. As well, Mr. Bernanke’s speech followed the release of minutes from the last Fed policy meeting, indicating that central bank officials are divided on whether economic stimulus should be wound down.

“Consensus about the future path of policy appears to be lacking, with ‘several’ on one side of an issue and ‘many’ on the other. The muddled approach to communications is also evident,” said Tim Duy, an economics professor at the University of Oregon, on his blog.

Investors love it: While a number of economists had begun to expect QE to start winding down as early as September, this timeline is now in doubt, especially given the rise in bond yields. The yield on the 10-year U.S. Treasury bond rose as high as 2.74 per cent last Friday, but has since subsided below 2.6 per cent – still a full percentage point above levels seen in May.

“In our view, the sharp rise in bond yields makes a September tapering announcement premature, and will have the Fed waiting into Q4 and trying to verbally push back against a further climb in yields in the near term,” said Avery Shenfeld, chief economist at CIBC World Markets, in a note.

Ongoing stimulus comes as the economy continues to show promise. True enough, China’s economy is causing some concerns, especially in the wake of disappointing export and import figures released on Wednesday (explained nicely by my colleague Scott Barlow). And yes, Thursday’s weekly reading on U.S. initial jobless claims was a setback.

But U.S. employment is on the rise and the housing recovery is building steam. And in Japan, the central bank upgraded its view of the economy, saying that it is “starting to recover moderately.” According to Bloomberg News, that marks the first time the Bank of Japan has used the word “recovery” since January, 2011.

 
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