Stocks surge on reassurance from Yellen
Stocks jumped Tuesday after Federal Reserve Chair Janet Yellen said she would continue the central bank's market-friendly, low-interest rate policies. It's a positive shift for the stock market, which had its worst January since 2010 as concerns about growth in China and the US sent investors shifting from stocks to bonds.
Reassuring words from the new head of the Federal Reserve sent stocks soaring on Tuesday and gave the market its longest winning streak this year.
The Dow Jones industrial average jumped nearly 200 points after Fed Chair Janet Yellen said she would continue the central bank's market-friendly, low-interest rate policies.
Investors also welcomed news that Congress appeared poised to raise the U.S. borrowing limit without the political drama that happened late last year. That would avert the threat of a disastrous default on the U.S. government's debt.
"Many of the risks everyone had their eyes on for 2014 are quickly being cleared away," said Kristina Hooper, head of U.S. investment strategies for Allianz Global Investors.
On Tuesday, the Dow Jones industrial average rose 192.98 points, or 1.2 percent, to 15,994.77. It was the Dow's third triple-digit advance in four days.
The Standard & Poor's 500 index rose 19.91 points, or 1.1 percent, to 1,819.75 and the Nasdaq composite rose 42.87 points, or 1 percent, to 4,191.04. The Nasdaq is now in positive territory for 2014, while the S&P 500 and Dow are down 1.5 percent and 3.5 percent the year, respectively.
The Dow and the S&P have risen four straight days, their longest stretch of gains this year.
It's a positive shift for the stock market, which had its worst January since 2010 as concerns about growth in China and the U.S. sent investors shifting from stocks to bonds. The first month was so rough, with frequent triple-digit swoons in the Dow, that it raised worries of a "correction," a decline of 10 percent or more from a peak. That kind of slump hasn't hit the stock market in more than two years.
But this week, investors had two worries resolved, analysts say.
Yellen, in her first public comments since taking over for Ben Bernanke at the Fed last week, told Congress that she expects a "great deal of continuity" with her predecessor.
Yellen said she supports Bernanke's view that the economy is strengthening enough to withstand a pullback in the Fed's stimulus, but that interest rates should stay low to encourage more growth. Last week, the Fed announced it would reduce its bond purchases by $10 billion to $65 billion a month.
"She's being well received (by investors)," said Rob Stein, CEO of Astor Investment Management in Chicago.
Politicians also appear to have reached an agreement over raising the nation's borrowing limit, also called the "debt ceiling."
House Speaker John Boehner said Tuesday that he would allow a vote to raise the borrowing limit without any conditions attached. The announcement came a few days after Treasury Secretary Jack Lew said the federal government would exhaust its ability to borrow money by Feb. 27. Lew urged Congress to pass a bill to raise the limit as soon as possible.
The approaching deadline had been a lingering source of worry for investors, who still bear scars from the last two debt debates.
The political tussle over raising the borrowing limit in August 2011 eventually led Standard & Poor's to downgrade the United States' credit rating, which in turn caused the stock market to go through three months of nauseating swings. During the October 2013 debate, the United States came within days of running out of cash, causing investors to flee some parts of the U.S. Treasury market out of fear that the federal government could not pay its debts.
"Investors were preparing for the debt ceiling negotiations to become a disaster," said Brian Reynolds, market strategist with Rosenblatt Securities.
The surge in the last four days has helped the market avoid its first correction since 2011.
The S&P 500's recent decline brought the index down as much as 5.8 percent from its peak of 1,848 reached on Jan. 15.
With the recent surge and signs of volatility fading, the market's "mini" correction may have been just enough for investors. The CBOE Volatility Index, known better as the "VIX" and an often-quoted sign of fear among investors, dropped by 5 percent Tuesday. The VIX is at its lowest level in three weeks.
"So many people expected a significant correction that it seemed like it was almost pre-destined to happen," Allianz's Hooper said. "Even though it was a 'mini-correction,' investors were able to check the box and now there's a greater comfort to move back into stocks."