Wednesday, February 14, 2007

Gentle Ben is Not a Bear, He's a Bull

Fed Chairman, Ben Bernanke, gave the first leg of his semi-annual report to the Congress on the condition of the economy today. As he began reading his prepared text, he knew what would soon be happening in the capital markets. He knew his "not too hot, not too cool" comments about the economy would rally both stocks and bonds.

But of equal importance was that he also knew that almost all of the world's stock markets were near multi-year highs. Thus, a speech emphasizing a balanced view of the economy would likely send stocks to new highs and give momentum to the world-wide bull market, while a more cautious tone would likely cause a sell off in stocks and keep animal spirits in check.

Ben was gentle, and he turned the bulls loose.

The charts below show the S&P 500 Index, which represents about 85% of US market capitalization and the EAFE Index, which measures the majority of the rest of the world's market cap. These two charts show that US and world-wide stocks have been in a solid uptrend since June. Both charts also show that US and international markets have been biding their time over the last month, digesting earnings and waiting for Mr. Bernanke to speak. Finally, both charts show a break to new multi-year highs today after Mr. Bernanke spoke.

None of us can see the future, but this much we can know. Mr. Bernanke knew what he was doing when he took a balanced tone, and he knew what would happen. We can only conclude that he believes that the soft-landing we have all been hoping for is playing out.

Please click to enlarge the images.