The world's top central banker is telling investors what they want to hear – and they are listening, driving U.S. stocks deeper into record-high territory as concerns about monetary policy and economic activity fade away.
The S&P 500 hit a new intraday high of 1693.12 on Thursday, edging past a peak seen in May. It also closed at a fresh record high of 1689.37, up 8.46 points or 0.5 per cent.
The gains continue a winning streak that began late last month when Federal Reserve chairman Ben Bernanke began to clarify monetary policy, easing fears by indicating that a winding-down of the Fed's bond-buying program does not mean interest-rate hikes will follow. Investors are taking his statements as an all-clear signal for further stock gains, at least in the United States.
"Markets have been marching forward ever since [Mr.] Bernanke tried to calm the waters," said Douglas Porter, chief economist at BMO Nesbitt Burns.
"I think he has done a very good job of holding the market's hand and saying the Fed is not going to do anything untoward."
Fears of a sudden shift in monetary policy had fed a bout of turbulence last month, pushing the S&P 500 down as much as 6 per cent and sending bond yields higher, raising concerns about the impact on borrowing costs and the recovering U.S. housing market.
Mr. Bernanke's soothing tones were again evident on Thursday, when he testified before the Senate Banking Committee that the Fed remains committed to the easy-money policies that have helped strengthen the U.S. economy in recent years.
"We are not talking about tightening monetary policy," he said, reinforcing the view that rate hikes will not happen before 2015.
Just as stocks have recovered, the yield on the 10-year U.S. Treasury bond has subsided to 2.54 per cent from a high of 2.74 per cent earlier this month. Lower rates reduce borrowing costs and are a spur to economic growth.
The economic backdrop is also looking relatively good. Initial jobless claims in the United States for the period ended last week fell by 24,000, a better reading than economists had been expecting and a further sign of healing within the labour market.
At the same time, markets are happy to shrug off economic disappointments, such as the sharp drop in June housing starts, released on Wednesday.
"There's a higher tolerance for softer data, knowing that the Fed is willing to wait it out" with ongoing stimulus, said Beata Caranci, deputy chief economist at Toronto-Dominion Bank.
But the stock market rally is being driven by more than big-picture economic data and policy decisions: The second-quarter earnings season is also progressing well. Bloomberg News reported that 75 per cent of companies within the S&P 500 have beaten earnings estimates so far this season.
That trend continued on Thursday. Morgan Stanley's earnings rose 66 per cent, adding to an upbeat earnings picture for U.S. financials. International Business Machines Corp., which reported Wednesday, also topped expectations, and raised its earnings forecast for the full year.
Despite the stock market gains, the S&P 500 trades at a reasonable 15-times estimated earnings, which has some observers optimistic that stocks can continue to rise. Earlier this week, strategists at Bank of America raised their year-end target for the benchmark index to 1750 from 1600, implying gains of another 4 per cent from current levels.
Still, U.S. gains are looking increasingly at odds with the most of the rest of the world. While the S&P 500 is up nearly 19 per cent in 2013, Canada's S&P/TSX composite index has risen less than 2 per cent this year, blue-chip European stocks have risen just 3 per cent and China's Shanghai stock exchange composite index has declined nearly 11 per cent.
"China has definitely down-shifted and Europe is showing very little ability to pull itself out of extremely weak conditions," Ms. Caranci said. "The U.S. is looking like the better contender, in terms of who has the greatest potential going forward."
David Berman