By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) — Don’t fight the Fed!
That is only way I know of making sense of the stock market’s surprising strength on Tuesday.
After all, the news coming out of Europe was so awful that most observers expected the U.S. stock market to plunge. Investors in effect concluded that this past weekend’s bailout of Spain was woefully inadequate. The credit ratings of more than a dozen Spanish banks were downgraded, and yields on Spanish government bonds spiked upwards to a record high — higher even than where they stood prior to that bailout.
And yet, far from plunging, the U.S. stock market rallied, with the Dow Jones Industrial Average DJIA -0.20% gaining 163 points.
Investors appear to be betting that the Fed and European central banks now have no choice but to stimulate their economies to a much greater extent than previously planned. Since much of that additional liquidity would find its way into equities, the stock market responded favorably.
To put it crudely: The news is so bad it’s good.