NEW YORK — Investors on Wall Street are playing a guessing game with the Federal Reserve. NEW YORK — Investors on Wall Street are playing a guessing game with the Federal Reserve. ADVERTISING On Monday, they guessed that the central
NEW YORK — Investors on Wall Street are playing a guessing game with the Federal Reserve.
On Monday, they guessed that the central bank will continue trying to prop up the economy and sent stocks higher.
The major stock indexes all rose about 1 percent in early trading and stayed there for most of the day, before dipping slightly in the afternoon. The Standard & Poor’s 500 index rose 12.31 points, or 0.8 percent, to 1,639.04. It had been up as much as 20 points.
The market’s gains were broad. Telecommunications was the only one of the 10 industry sectors in the S&P 500 to post a loss. Netflix did better than any other stock in the S&P 500 after announcing that it will run original TV series from Dreamworks Animation.
Overall, though, there were few big company announcements or economic reports. Trading was light, the day more a holding pattern than a referendum. Investors will have to keep guessing about the Fed’s future actions until Wednesday, when it will release a policy statement shortly after midday.
Investors sent stocks up Monday because they think Fed policymakers will determine that the economy isn’t recovering fast enough.
That might seem like a contradiction, but a still-weak economy would influence the Fed to continue its programs designed to stimulate the economy: keeping interest rates low to encourage borrowing, and buying bonds to push investors into stocks.
Not everyone thinks that’s a logical pattern.
Doug Lockwood, branch president of Hefty Wealth Partners, a financial advisory firm in Auburn, Ind., said it’s not rational for the stock market to regard bad news as good, and to be yanked back and forth more by the actions of a central bank than the underlying fundamentals of the economy.
“I think the market’s a little hooked on a drug here,” Lockwood said. “You take drugs, you feel better, but it’s short-lived. Printing of money should never be considered a great thing for the economy.”
The market has been in flux since May 22, when Fed Chairman Ben Bernanke said the Fed would consider pulling back on its bond-buying program if measures of the economy, especially hiring, improve. The comment, made not in prepared testimony but in response to a question from the Joint Economic Committee in Congress, was not expected. In the 17 trading days since then, the Dow Jones industrial average has swung by triple digits 11 times. Overall, the Dow is down about 1 percent since before Bernanke’s testimony.
Jim McDonald, chief investment strategist at Northern Trust in Chicago, said Bernanke will seek to “walk back” on some of his previous comments, and reassure investors that the Fed won’t pull back on stimulus until it’s sure the economy is ready.
The surprise factor, more than the substance of Bernanke’s comments, might have been what unnerved investors, McDonald said.
“The market hates surprises,” McDonald said. “And he surprised us.”
The fact that Bernanke is now expected to regard the economy as weak enough to still need stimulus stems from two main data points issued since his testimony, analysts said: a jobs report and low inflation.
Earlier this month, the government reported that the U.S. added 175,000 jobs in May — a solid addition, but not enough to cut into the unemployment rate. And on Friday, the government said that a key measure of inflation — the producer price index, which measures wholesale prices — rose just 0.1 percent after stripping out the volatile costs of food and gas.
That’s important because the Fed knows that its stimulus measures can stoke inflation; if inflation is low, that gives the central bank more flexibility to keep pumping money into the economy.
