- The Washington Times - Friday, August 21, 2009

NEW YORK — Federal Reserve Chairman Ben Bernanke said what investors wanted to hear, that the economy is indeed on the verge of recovery, and they responded with a rally that sent the major indexes to new highs for the year.

The Dow Jones industrials shot up 155 points Friday, closing above 9,500 for the first time since Nov. 4, and all the big indexes finished with gains of more than 1.5 percent. Meanwhile, Treasury prices tumbled, pushing yields sharply higher, as investors no longer felt they needed the safety of government debt.

The stock market’s gains were broad, reaching across all industries, but the biggest jumps came from energy, industrial and material stocks as oil and commodities prices soared. Bank stocks also rose sharply.

“The prospects for a return to growth in the near term appear good,” Bernanke said at an annual Fed conference in Wyoming. He did warn, however, that lending is not back to normal, and that the difficulty consumers and businesses are having obtaining loans will be a challenge.

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A bigger-than-expected jump in home sales also gave stocks a boost and helped send bonds lower. The National Association of Realtors said sales of existing homes rose 7.2 percent to a seasonally adjusted annual rate of 5.24 million in July, from a pace of 4.89 million in June.

It was the fourth straight monthly increase and the highest level of sales since August 2007. The rise in sales came amid a sharp decline in home prices.

The day’s news jump-started a listless market that has been marked by choppy trading this week amid mixed economic news and light summer volume.

Though Bernanke’s positive assessment on the economy was encouraging, the market’s challenges, including rising unemployment and sluggish consumer spending, are certainly far from over. The market appears to be on an upward trajectory, but analysts cautioned that stocks will likely bounce around through at least the rest of the summer.

“The news isn’t going to be all good from here on out,” said Jordan Smyth, managing direct at Edgemoor Investment Advisors in Bethesda, Md.

According to preliminary calculations, the Dow rose 155.91, or 1.7 percent, to 9,505.96. The Standard & Poor’s 500 index rose 18.76, or 1.9 percent, to 1,026.13, while the Nasdaq composite index rose 31.68, or 1.6 percent, to 2,020.90.

About four stocks rose for every one that fell on the New York Stock Exchange where volume came to 1.48 billion shares.

Bond prices tumbled. The yield on the benchmark 10-year Treasury note, which moves opposite its price, jumped to 3.56 percent, from 3.44 percent late Thursday.

The Russell 2000 index of smaller companies rose 12.83, or 2.3 percent, to 581.51.

In other signs of investors’ growing confidence in the economy, oil prices touched their highest point of the year on hopes that energy demand will soon pick up. After briefly nearly $75, light, sweet crude for October delivery rose 98 cents to settle at $73.89 a barrel on the New York Mercantile Exchange.

And the dollar, which, like Treasurys, is considered a safe-haven asset, tumbled against other major currencies.

Bernanke’s comments were consistent with the Fed’s observations about the economy earlier this month, which similarly helped re-energize the stock market after its summer rally had stalled. But later that week, reports showing weaker-than-expected retail sales and flagging consumer confidence overshadowed the Fed’s upbeat view of the economy and stocks toppled.

Next week, investors will get two key reports on consumer confidence that, if worse than expected, could easily upset the market’s gains.

“We’re not past the volatile stages of the market,” said Lowell Pratt, president of The Burney Co., an equity management firm.

Investors have been closely watching for signs that consumers, like the market, are becoming more confident about the economy’s prospects for recovery and in turn will increase their spending. Consumer spending accounts for more than two-thirds of economic activity.

But as long as job losses continue to mount, it will be difficult for consumers to feel comfortable about spending freely.

“Consumer spending normally is the driver of recoveries at the beginning,” said Bob Baur, chief global economist at Principal Global Investors. “That’s not happening this time.”

“At some point, the market is going to ask to see more than just mixed data,” he said. “It’s going to want to see some real jobs produced and an end to job losses and some validation that the consumer isn’t going to stay in a slump.”

Analysts have long warned of an eventual decline in stocks after the market’s massive jump since early March, during which major indexes have risen more than 40 percent off of 12-year lows. But the market has yet to see a significant pullback.

Though trading has been erratic this week, the market has managed to eke out three days of moderate gains after a big drop in stocks on Monday. Major indexes are all on track to post gains for the week and finish at their highest levels of the year.

Overseas, Japan’s Nikkei stock average fell 1.4 percent. Britain’s FTSE 100 gained 2.0 percent, Germany’s DAX index jumped 2.9 percent, and France’s CAC-40 soared 3.2 percent.

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