Wall Street stocks rebounded from a three-day selloff on Wednesday as comments from Federal Reserve Chairman Ben Bernanke raised hopes for further stimulus of the U.S. economy if needed.
The Fed's previous stimulus effort, known as QE2, had helped the stock market to advance with $600 billion in bond purchases, which added liquidity to the economy and contributed to low interest rates.
The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support, Bernanke told the House Financial Services Committee.
The CBOE Volatility Index <.VIX>, Wall Street's fear gauge, fell 7.6 percent to 18.37 after the comments. Over the past three days, the VIX climbed almost 25 percent while S&P 500 lost about 2.3 percent, pressured by weak earnings and concerns over Europe's debt crisis.
The last round of quantitative easing was absolutely beneficial for stocks, and the gains today are on the prospects for what is potentially further stimulus, said John Kosar, director of research at Asbury Research in Chicago. However, the fact that we're even discussing another round shows how the economy is still struggling.
His comments came as investors were divided over whether the Fed would introduce another round of stimulus to boost the economy, especially after June's dismal jobs report. The Fed's easy money policies since 2008 have been fueling the stock market's rally.
The Dow Jones industrial average <.DJI> was up 124.27 points, or 1.00 percent, at 12,571.15. The Standard & Poor's 500 Index <.SPX> was up 13.55 points, or 1.03 percent, at 1,327.19. The Nasdaq Composite Index <.IXIC> was up 33.64 points, or 1.21 percent, at 2,815.55.
Energy and material stocks were the top gainers. The S&P energy sector index <.GSPE> shot up 1.5 percent while August crude futures gained 1.2 percent alongside a drop in the dollar. The S&P materials sector index <.GSPM> rose 1.6 percent. Baker Hughes Inc
Wall Street got an early boost from overseas data that showed China's economy grew faster than expected in the second quarter.
But there was still caution over developments in Europe. Moody's downgraded Ireland's debt to junk late on Tuesday and said Ireland was likely to follow Greece in needing a second bailout. Irish bond yields jumped to record highs.
Bernanke is helping stocks today, but considering everything else that's on the table, I imagine that in a short period the market will return to focusing on issues like Europe and the U.S. budget deal soon, said Dan Ripp, president of Bradley Woods & Co Ltd in New York.
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(Reporting by Ryan Vlastelica ; Editing by Kenneth Barry)