Is Bernanke's Optimism Contagious?

The Fed chief offers an upbeat assessment of Europe's debt crisis.

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Federal Reserve Chairman Ben Bernanke, testifying on Wednesday in front of the House Budget Committee, offered an upbeat assessment of the U.S. economy’s ability to weather the debt crisis that’s brewing in the euro zone. “The actions taken by European leaders represent a firm commitment to resolve the prevailing stresses and restore market confidence and stability,” he said. “If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest.”

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While Bernanke’s comments were not all optimistic--he warned that the federal deficit “appears to be on an unsustainable path”--his remarks about Europe were a welcome respite for many of the same jittery investors who have put the markets through a roller-coaster ride since May.

But how far--if any distance at all--will his reassurance carry stocks? “There’s obviously on any given day a variety of factors that move the markets one way or the other, but I think his statements, which were generally positive, were taken as such by the markets,” says Dan Greenhaus, the chief economic strategist at Miller Tabak. Notably, the Dow picked up steam on Wednesday, once again crossing the 10,000 mark during intraday trading. “It’s not surprising to see the markets swings when he [talks],” says Greenhaus of Bernanke. “Let’s not forget that this is a guy who can basically say that he’s having a turkey sandwich for lunch and the price of turkey goes up.”

Jeffrey Kleintop, the chief market strategist at LPL Financial, is more skeptical. He says that while the Fed’s actions to help European governments get access to liquidity, coupled with its stated commitment to resolving the debt crisis, are quite encouraging and should help to stabilize the stock market, investors may shrug off Bernanke’s rosy outlook. “His reassurances that we’ll weather the crisis and that it’s not a big deal--I think those alone are not enough to make anybody feel better,” he says. “The Fed simply doesn’t have a great track record at forecasting these events.”

So what will it take for investors to let up, in any sustainable fashion, on their concerns over Europe? Greenhaus expects upcoming indicators of the U.S. economy’s strength will substantiate Bernanke’s comments, thereby helping stocks regain some momentum. “As more information comes out corroborating the idea that the potential euro zone slowdown is not sufficient to tip the U.S. economy over, I expect to see [positive] movements in markets,” he says.

Kleintop says he’s enthusiastic about the fact that the Libor, which reflects the rates that banks pay to borrow from each other, has held steady as of late. “Banks aren’t charging any more to lend to each other. The concerns about default or concerns about increasing stress or credit pressures just aren’t becoming evident. And that stabilization is very important,” he says.

If indicators don’t deteriorate, Kleintop expects to see professional investors start to regain their nerve rather soon. “I’m not sure the individual investor is going to feel that much more confident in Europe, even at the end of the year. But the professional investor, looking at some of the key metrics, may begin to feel some confidence return in the coming weeks,” he says.

Still, even the pros are likely to remain skeptical about Europe’s long-term health, particularly as austerity measures cut into countries’ growth opportunities. “You’re not going to see credit default swaps fall sharply, because longer term there is an issue there,” Kleintop says. “But in the near term, the contagion effect of that on that on the rest of the global financial markets I think has been contained.”