When is bad news not really bad? When it's eclipsed by the promise of enduring easy money for Wall Street.

Case in point: On Wednesday, data showed U.S. new home sales in January slumped to the worst level in 47 years. It was the worst pace since the Commerce Department started keeping records, yet stocks rallied.

Just a day earlier, a 10-month low for consumer confidence sparked stocks' worst sell-off in close to three weeks, and stocks were bogged down much of Thursday by equally gloomy durable goods orders.

What made the difference? Ben Bernanke. The Federal Reserve chairman on Wednesday all-but-guaranteed the spigot of easy money will stay open after fueling the market's rebound since last March's 12-year low.

The Fed is keeping interest rates near zero to encourage lending to businesses and consumers in order to stimulate growth. What is also means is there is little money to be made by investors holding cash or bonds, making equities a more lucrative bet.

This is a little different from when you have a robust economy where you can buy the market and everything goes up because you believe in the economy, said Keith Springer, president of Capital Financial Advisory Services in Sacramento, California.

This is buying the individual securities you think will benefit from low interest rates and liquidity, which just happens to be the majority of stocks.

Economic data shows the recovery remains fragile at best, but, paradoxically, that provides short-term encouragement for investors who don't want the Fed to leave the party early.

The market has seen this kind of behavior before. In 2008 during the worst of the financial crisis, Wall Street often looked past negative data or earnings reports due to confidence in a long-standing low-interest rate policy.

Stocks mounted one of their best rallies in 2008, rising 4.2 percent on March 18 of that year when the Fed cut rates by 75 basis points to 2 percent. But the Fed's statement couldn't have been more depressing on the economic outlook, noting considerable stress in financial markets and deepening of the housing contraction.


This week, Bernanke sought to alleviate concerns saying the U.S. central bank's policy-setting Federal Open Market Committee was prepared to support the economy with ultra-low rates for some time. The Fed's raising of the discount rate the week before had prompted some to wonder if it signaled the beginning of a tightening cycle.

The Fed wants to start to pull some of this stuff back. I liken it to, you want your kid to start walking, but they take those first couple of steps and you're grabbing their hand so they're not falling over, said Kurt Brunner, portfolio manager at Swarthmore Group in Philadelphia.

It's an apt comparison, as the Fed has been holding the market's hand for months now. Stocks have recovered sharply from the 12-year low hit in March 2009, but are still far from the highs of late 2007.

And while stocks, over the long term, will ultimately react to improvements in the economic outlook, the liquidity efforts -- particularly near-zero interest rates -- are enough to propel short-term rallies even on weak figures.

Indeed, investors eager to buy stocks on a dip have prevented a serious market correction even though equities had gained nearly 70 percent at one point compared to March's low. That mood has also helped short-term action, as seen on Wednesday.

U.S. fund managers increased exposure to equities in February to reach their highest level in 14 months, a Reuters poll showed this week.

Based on 11 U.S.-based fund management firms surveyed between February 11 and 24, they held an average 66.2 percent of assets in equities in February, up from 64.8 percent in January.

As well, the Investment Company Institute reported domestic and foreign equity funds had estimated inflows of $1.11 billion for the week ended February 17. It was the first such inflow in February.

It is unclear how much this week's poor data has affected analysts' outlook for the rest of the year. Most expect reports to be mixed until the recovery gains traction. Others note winter storms in January and February likely altered the data.

Long term, uncertainty over the sustainability of the recovery nags, with investors worried about a possible double-dip recession in coming quarters. Though expectations for 2010 earnings growth have been pulled back, analysts still expect decent corporate profit to offset economic dark clouds.

The easy money helps, the policy helps, said Mike O'Rourke, chief market strategist at BTIG in Philadelphia.

But beyond the liquidity and economic fears, improving earnings and positive executive comments make a strong case for stocks, especially once the economic outlook becomes clearer, said O'Rourke.

The rally is justified in that sense, but obviously the Fed policy has helped us get to that point.

(Editing by Leslie Adler)