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Bernanke and Obama Start to Relax, so It's Time to Get Nervous

One of the best contrarian plays is to buy stocks when the economy is recognized by the Establishment to be in a recession. By the time that the government and media acknowledge the dire truth, investors are well aware of it and have gotten their selling out of the way.

Will the same strategy work in reverse? Ben Bernanke, the Federal Reserve chairman, told a conference of Fed officials in Wyoming last week that economic activity worldwide seemed to be leveling out and that growth would resume soon.

His optimism could be a good excuse to take some money out of stocks after one of the swiftest, most forceful rallies ever.

It is easy to see why Bernanke would sound the all-clear, or at least the almost-clear. The economy has been losing jobs at a much slower rate than a few months ago, and reports from the housing market, where the whole mess started, have begun to show growth.

Banks are on much more solid footing than last winter, and interest rates on debt that had been considered of dubious quality have plummeted. Both are evidence that the financial system is in a far less precarious state. Corporate earnings have been much better than many had predicted too.

But the stock market seems to greet each piece of good news with a resounding two cheers. It rallies almost every time, often sharply, but only for a few minutes or an hour or two, before flattening out and occasionally surrendering the gain.

The Standard & Poor's 500 index remains near its peak since recovering from a climactic low in early March, but momentum is ebbing away. The first half of the rally, into early June, took the index up more than 40 percent. Since then, over a similar length of time, it has managed to tack on only a further 8 percent or so, despite the much more heartening backdrop.

Bernanke is not the only person in charge who seems to think that the crisis has passed. That's what President Obama was indicating, whether he meant to or not, when he said this week that he would reappoint Bernanke to another term as Fed chairman.

As with other auspicious developments lately, traders appeared underwhelmed. They bought stocks in a brief flurry before having a change of heart that sent indexes below where they were before the news broke on Monday.

Robert J. Samuelson points out in an op-ed piece in the Washington Post that Obama had little choice but to keep Bernanke where he is. The chairman has been so lauded for saving the economy that Obama could hardly replace him with a party hack (albeit one with a Ph.D) like Lawrence Summers.

The president did have a choice of when to make the announcement, though; Bernanke's term ends in January, not the day after tomorrow, so there was no rush. Obama would only have given the head's-up if he were fairly sure that conditions were no longer fragile. Officials get fired when all hell is breaking loose, but they don't get rehired then.

The muted reaction in the stock market doesn't mean that Wall Street wants to see Bernanke go. If Obama had indicated that he was planning to name someone else, stocks almost certainly would have tanked. But the reappointment had become the default view and was priced in already.

It's the same with the perkier economic data and corporate results. A Fed chairman must exercise extreme caution. If conditions have improved so much that Bernanke is willing to say so out loud, then chances are he's stating what many others already believe and have acted on. That means it will take a lot more good news to move share prices higher and not much of a negative surprise to spark a reversal.

The rally that comes after a recession is confirmed tends to be as vigorous as it is shocking. With a consensus building that the economy is out of the woods and people in high places appear to agree, the stock market may be vulnerable to the same kind of move, only down.

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