NEW YORK -- Wall Street started the week with its worst single day since December 2008 Monday. But it followed up on Tuesday with its best day since March 2009.
The Dow Jones industrial average closed more than 429 points up on Tuesday, just one day after a massive sell-off that saw the Dow tumble 634 points. The gains were widely attributed to a mid-day statement from Federal Reserve Chairman Ben Bernanke, who announced the Fed’s intentions to keep interest rates low for another two years.
“Investors in a market hate uncertainty,” Ron Florance, managing director of investment strategy at Wells Fargo, told The Huffington Post. “Certainty is always better than uncertainty, and I think that’s what we saw in the Fed’s statement today.”
For investors following the market on Tuesday, it wasn't clear that a rally was on the way. In the afternoon, immediately following the Fed’s statement, the Dow fell to a daily low of 10,604.07, more than 600 points below the day’s high point.
By the closing bell, though, the Dow had recovered to 11,239.77, a 3.98 percent gain for the day. The Standard & Poor's 500 Index was up 4.7 percent, and the Nasdaq composite gained 5.3 percent. According to the Wall Street Journal, it was the Dow’s 10th-best day by points in history -- coming just after its sixth-worst.
Bernanke’s remarks appear to have had a calming effect on a market spooked by a worsening debt crisis in Europe and an unprecedented downgrade of the United States' sovereign credit rating by Standard & Poor's.
The Federal Reserve will keep its key interest rate near zero until the middle of 2013, Bernanke said Tuesday. It has also "discussed the range of policy tools available to promote a stronger economic recovery” -- a phrase that many interpreted as a hint that the Fed may be considering a third round of quantitative easing stimulus measures, which would be known as QE3.
Though the Fed offered relatively little in the way of concrete pronouncements, investors were nevertheless reassured to hear from the central bank, said Florance.
“They've never given that specific of a time horizon,” he said of the Fed. "Investors can say, 'They're not going to stand by idly and just let it fall apart. At least I have a little certainty.'"
Still, markets are expected to remain volatile for the near future.
"Investors need to be ready to withstand extreme hyper-responses," said Florance. "We'll see it for a couple more weeks, but that's not to say 600-point days."
Economic reports, like the government's monthly retail sales numbers to be released Friday, will have particular power to move markets, said Dan Greenhaus, chief global strategist at BTIG.
"Going forward, the most important thing for investors is data suggesting the U.S. is or is not going into recession," Greenhaus told The Huffington Post. "In terms of what will provide stability, it will be economic data that will push that argument in one direction or the other."
The actions of policymakers are likely to have an effect as well. The prolonged negotiations over the debt ceiling, which brought the country to the edge of default and led to the credit downgrade from Standard & Poor’s, are already believed to have damaged investor confidence, and further partisan rancor would do little to bring about market stability.
"Getting to a point where we start to see some leadership and action from Washington, instead of bickering, would help," Florance said.