Here's the Reason Stocks Are Up Today

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Stocks are getting a lift this morning from news that Larry Summers has withdrawn as a candidate to become the chairman of the Federal Reserve, leaving Janet Yellen, the current vice chair, as the front-runner to succeed Ben Bernanke. The S&P 500 (SNPINDEX: ^GSPC  ) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) are up 0.82% and 0.96%, respectively, at 10:15 a.m. EDT. Those gains now put the S&P 500 within roughly half a percent of its Aug. 2 high. News that the U.S. and Russia have reached an agreement on Syria, signed in Geneva on Saturday, haven't hurt sentiment, either.

Why is the market reacting positively to Mr. Summers' withdrawal? For two reasons: First, the market perceives him to be more hawkish than Ms. Yellen with regard to the Fed's bond-buying program (i.e., "quantitative easing," or money-printing, in plain English).

Second, he is the candidate that presents greater uncertainty, whereas Yellen is thought to be one of the architects of the Fed's post-crisis policies, and investors believe she represents greater continuity with Chairman Ben Bernanke's tenure. As The Economist noted on Aug. 10:

Ms Yellen's views are an open book. She has written and spoken extensively on monetary policy and the thinking behind the Fed's current strategy. ... Mr Summers's writing suggests his views are conventionally Keynesian... But he has sat out the day's heated monetary debates -- save for a mildly sceptical take on QE in remarks at an April conference -- and focused instead on fiscal issues... Although he is surely more open on monetary policy with Mr Obama, the rest of the world is left guessing his views.

And speaking of monetary policy, the Federal Open Market Committee begins its two-day September policy meeting tomorrow. The consensus view appears to be that the Fed will initiate a slow tapering of its $85 billion-per-month bond purchases. I now believe this view is correct (Mark Dow's excellent column was instrumental in convincing me); nevertheless, the size and mechanics of a potential tapering leave some room for a little volatility in the stock and bond markets this week.

Does any of this matter? Here's a secret that the financial media has no incentive to reveal -- or doesn't understand: The parlor games of handicapping the next Fed chair or the path of quantitative easing has very little to do with the business of investing. Fundamentally oriented, long-term investors ought to remain focused on unearthing great businesses trading at attractive valuations.

Here's a big-picture "macro" trend that is relevant to individual investors: The U.S. government has piled on more than $10 trillion of new debt since 2000. Annual deficits topped $1 trillion after the financial crisis. Millions of Americans have asked: What the heck is going on? The Motley Fool's new free report, "Everything You Need to Know About the National Debt," walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read the full report!

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8/26/2016 4:32 PM
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