Stocks are pushing towards all-time highs on the news that Larry Summers withdrew his name for consideration to replace Ben Bernanke when the Fed Chairman's second term ends early next year. President Obama first floated the idea of a Summers nomination several months ago to the considerable displeasure of many in Washington DC and Wall Street. Until Summers emerged as Obama's top choice it had been widely assumed current Fed Vice Chair Janet Yellen was the leading candidate.
In early trading the S&P500 (^GSPC) topped 1,700, less than 10 points off the record high set on August 2nd. Yields on the U.S. 10-year treasury (^TNX) dropped to 2.8% on the perception of a more gradual reduction of stimulus while gold staged a less than 1% rally barely eating into its recent losses.
The consensus on Summers was that he was more likely to divert from the widely hinted at plan for the Federal Reserve to reduce its $85 billion monthly quantitative easing program. Despite stubbornly mixed economic data most market participants still expect the FOMC to begin tapering its latest round of QE later this week.
"Although there's a really good chance that we'll start to taper at the meeting this week, the tapering will be far more moderate under Yellen than it would be under Larry Summers," says Hugh Johnson, chairman of Hugh Johnson Advisors. "Summers was a little bit of a problem."
Even his detractors concede Summers withdrawing his name from consideration is cause for unbridled celebration. For all the hand-wringing it was always hard to take Summers all that seriously as a candidate. Though widely seen as more hawkish, he's actually been all over the map regarding his thoughts on how to go about removing economic stimulus; both criticizing QE's existence and cautioning against sudden withdrawal.
So what can you make of the rally? The bet here is investors were simply too cautious heading into fall as the prospects of tapering, Syria, a punk economy and the debt ceiling loom large. The S&P500 put on 4% in a week after as it became less likely that Syria would break into a full-blown conflict in the immediate future when Russian President Vladimir Putin injected himself into the conversation.
Those caught short or out of the stock market are getting a brutal reminder that every so often the worst case scenarios don't come to pass. Bears can take solace in the fact that the goofy Hindenburg Omen is still in play and famously Gloomy pundits are still looking for a crash. Failing those catastrophes, when stocks gap higher such as they are today it's generally an opportunity to take some gains rather than chase the market higher.
Programming Note: Be sure to catch our live post-Fed coverage on Thursday September 19 at 9:25am/est.
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