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.
The Dow Jones Industrial Average (DJINDICES:^DJI) got off to another positive start this morning, riding the wave of enthusiasm over Fed Reserve chair nominee Janet Yellen's testimony before Congress yesterday. The Dow rose another 46 points as of 10:55 a.m. EST to push further into record territory, and some of the biggest gains came from card network giants Visa (NYSE:V) and American Express (NYSE:AXP), as well as Wall Street banks JPMorgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS). Why are financial stocks in particular winning from Yellen's testimony?
How a friendly Fed helps financials
The rise in financial stocks comes from three positive factors in the Fed's easy monetary policy. First and foremost, extended periods of low interest rates will help JPMorgan Chase and its fellow retail banks sustain some of their most profitable business lines from the past few years. In particular, if the long-awaited tapering of quantitative easing doesn't happen as soon as expected, bond purchases could push long-term interest rates back downward, helping lead to one more wave of mortgage lending and refinancing activity. With JPMorgan Chase pointing to falling refinancing activity as a drag on profits recently, any renewal of mortgage lending could provide an unexpected boost.
More broadly, a friendly Fed leads to a greater sense of optimism about the overall economy. That's vital for Visa and American Express, as both companies rely heavily on consumers' willingness to spend money in order to support their card networks. With Visa having no credit risk from its business and with AmEx focusing largely on higher-end clients for whom default risk is muted during periods of economic expansion, anything that drives consumer sentiment higher is a positive for their businesses.
Finally, low rates support the continuing shift into the stock market among investors, and that's positive news for the underwriting and investment businesses of Goldman Sachs and JPMorgan Chase. Goldman's recent leadership in the Twitter IPO was just the highest-profile example of how activity in the initial-public-offering market has climbed dramatically. For Goldman, underwriting success will rely on the continuation of the bull market, and Yellen's support could help extend the bull years longer down the road.