Markets no longer have to choose between a stronger economy and easy money. Now they can have both.
Comments from U.S. Federal Reserve Board chairman Ben Bernanke set stocks flying on Thursday and pushed the Standard & Poor's 500 index to a record high close as investors concluded they had overreacted to earlier hints that the Fed might raise its key interest rate sooner than expected.
"The Fed chairman's new message seems to be: 'Ignore everything my colleagues and I have been saying in recent weeks... let's have a melt-up in stocks,'" Ed Yardeni, head of Yardeni Research, said in a note.
He scratched out his call for market doldrums this summer and now sees more gains ahead.
The S&P 500 closed at 1,675.03, up 1.4 per cent. The blue-chip Dow Jones industrial average also set a record, finishing at 15,460.92, up 1.1 per cent.
Stocks have experienced a volatile month after the Fed pointed to recent improvements in the U.S. economy, such as rising employment numbers.
Investors worried that the central bank was contemplating an end to its bond-buying program – known as quantitative easing or QE – and rate hikes soon after.
Despite the signs of a stronger economy, the S&P 500 retreated as much as 5.8 per cent from its high in May over concerns that share prices and corporate profits cannot thrive without central bank assistance.
Bond prices sank, raising borrowing costs and side-swiping dividend-paying stocks.
Now, though, Mr. Bernanke is assuring markets that the Fed is in no rush to shift gears, remarking on Wednesday evening that the economy requires "highly accommodative monetary policy for the foreseeable future."
"He really wants to get the message out that rates are going to remain low for a very long time," said Michael Gregory, an economist at BMO Nesbitt Burns.
While markets had begun to anticipate rate hikes before mid-2015, Mr. Bernanke's remarks suggest that increases could be pushed back further.
The stock market rally moved well beyond the United States. Canada's S&P/TSX composite index rose 1.5 per cent, Germany's DAX index rose 1.1 per cent, the U.K.'s FTSE 100 rose 0.6 per cent and stocks rose throughout Asia as well.
Bond yields subsided and hard-hit dividend stocks and home builders rebounded.
As investors cheer the Fed's clarified line on stimulus, they can also welcome improvements in the U.S. economy without worrying that a stronger recovery will mean an end to stimulus.
"The Fed is saying: 'We may stop easing, but the strength of the economy over the next six or 12 months is immaterial to how we're thinking about interest rates,'" Mr. Gregory said.
"So is the market afraid of stronger economic data? Not as much as before."
Although initial jobless claims for last week rose to an eight-week high of 360,000, the bigger picture remains encouraging.
Monthly payrolls are rising, the unemployment rate is coming down and the housing market is recovering.
Overseas, the picture is also looking upbeat.
In Japan, the central bank upgraded its view of the economy, saying that it is "starting to recover moderately" – a signal that the country's recent efforts to stimulate its economy are working.
Markets face challenges ahead, however. China's economy appears to be slowing down, especially after exports and imports unexpectedly dropped in June, raising concerns about an economic hard landing. And of course, Europe is still mired in recession.
But the gains in the stock market suggest that one fear has been removed: The Fed is not going to do anything drastic.
David Berman