Stocks' Best Friend: Ben Bernanke
This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.
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The stock market tanked last week for lots of reasons (President Obama's announcement on new regulatory reform, worries over China's efforts to cool its economy, need for a correction), but the one bearish culprit I'm focusing on today is our Federal Reserve Chairman, Big Ben Bernanke.
Last week, when Bernake's reappointment was in jeopardy, investors sold off shares. After a weekend when a couple of prominent Republicans reiterated their support for a BB second term, US stocks rise. The lesson? Cheap money rules!
Bernanke took the lead on forging zero interest rate policy ("ZIRP") in the aftermath of the financial crisis, though other central bankers followed. With government guarantees of the financial system in place and short term interest rates across the globe sitting below 1% for over a year, what were investors supposed to do? Take action, of course!
For some, sitting out the bottom in zero percent government bonds waiting for the financial world to end was preferable to risking even one dollar. Others were also nervous, but zero percent money was simply too juicy to pass up. The bold looked around and figured out that government officials and central bankers were unwilling to let the bottom fall out. So they nibbled at some risk assets. Then they took on a little more…and then some more…and all of the sudden stocks were up over 60%.
Bernanke's reappointment doesn't ensure the continuation of ZIRP forever, but on a rainy Monday in New York, it's providing temporary cover for beaten up bulls.
