Worried Rates Are About to Jump? Not To Worry, Yellen Tells Senators

Here's what the markets learned from Janet Yellen's confirmation hearing as Federal Reserve chairman on Thursday.
Low rates are the status quo – until they're not. And it is not clear when low rates will NOT be the status quo. But at least until sometime in 2014. There were three results from that perception:
• Stocks rallied. The Dow Jones industrials and the Standard & Poor's 500 Index closed at new highs; the Nasdaq Composite Index finished at its highest level in more than 13 years.
• Bond yields fell back. The 10-year Treasury yield ended at 2.702 percent, down from Wednesday's 2.725 percent.
• The U.S. dollar moved higher against the euro, the Japanese yen, the Chinese yuan and the Canadian dollar.
The Dow's close at 15,876 puts the blue chips within 124 points of 16,000. The S&P 500 is within 10 points of 1,800, and the Nasdaq is within 28 points of 4,000, a level not seen since September 7, 2000.
Yellen was clear she doesn't want to do anything that could derail a fragile economic recovery. She believes that the Fed's actions since 2008 have helped stabilize the global banking system and helped create 7.8 million private-sector jobs since the jobs market bottomed in February 2010. For those counting, that's 88.9 percent of the 8.82 million jobs lost between early 2008 and the 2010 bottom.
A stronger recovery will let the Fed end its reliance on what she called in her testimony "unconventional policy tools." That's code for the Fed's $85 billion-a-month program to buy bonds to ensure low interest rates.
And here is where Yellen scored a big point. The bond buying, better known as quantitative easing, or QE, can't go on forever, she said. The trick will be how to end the bond buying without interest rates soaring.
That's a question for later. Right now, low interest rates will stay that way. So, would-be home buyers should go for it.
All in all, investors seemed relieved. The betting is that Yellen will win easy confirmation. Not only did the major averages move higher, but the Dow Jones Transportation Average closed at a new high. Home building stocks jumped, with the iShares US Home Construction exchange-traded fund ITB ending up 2.4 percent to $22.66, its best performance since October 22.
The ETF is up 7.1 percent this year. It had been up as much as 22.9 percent before talk of the Fed's tapering bond buying wiped out the gain. The ETF is up 9.6 percent since bottoming in mid-August.
There were some downsides to the markets' reaction to the Yellen love fest.
• The Russell 2000 small-cap index was lower on the day, continuing a pattern of relative weakness since September. The index is up one percent for the month, compared with 2.1 percent and 1.94 percent gains for the Dow and S&P 500, respectively.
• The rally could have been much bigger. But disappointment with earnings and guidance from Cisco Systems CSCO weighed on the market. Cisco's 11 percent decline to $21.37 subtracted nearly 17 points from the Dow.
• Savers won't be getting much relief any time soon. The recovery is more important to Yellen. What that means essentially is this: The Fed wants you to buy stocks. The Fed wants corporate America to invest, not horde cash.
Lastly, the market's surge in the last week is pushing the major averages closer to overbought levels.
The relative strength indexes for the Dow, S&P 500 and Nasdaq ended the day at 65.8, 66.2 and 63.8, respectively. A reading of 70 suggests a market is overbought.
The Dow is trading 5.9 percent above its simple 200-day moving averages, with the S&P 500 up 9.45 percent over its 200-day average, the highest level since mid-August. The Nasdaq finished the day trading 13.3 percent above its 200-day moving average. That's high, but it was 14.3 percent in mid-October.