A Dovish Yellen and a Dovish Congress Drive Stocks Higher

On Tuesday, the equity markets enjoyed one of their best days of the year, with big buying in the broad market that sent the S&P 500 back above its 50-day moving average. The benchmark measure of the domestic equity market really started to take off around 11 a.m. EST.

Why?

Well, that’s when Fed Chairman Janet Yellen began answering questions about the labor market during her Congressional testimony. Comments by Yellen indicating she was “surprised” by the weakness in the December employment report, and that despite seeing some improvement in the labor market, things weren’t yet back to “normal,” were widely read as “dovish.” That comment means the Fed likely will keep its foot on the accelerator until the labor market improves substantively.

Perhaps more importantly, Yellen stressed “continuity” in Fed policy from the previous Bernanke-led Federal Reserve regime. That means she’ll continue to be dovish when it comes to monetary accommodation and rock-bottom interest rates.

The other “dovish” move helping lift markets on Tuesday was word that House Speaker John Boehner would bring a “clean” debt-ceiling extension bill to the House floor. That’s being done right now, and that will basically end the possibility of any debt-ceiling drama. Stocks definitely liked that news, as stocks like a “no drama” environment.

I guess Speaker Boehner’s dovish stance on a debt-ceiling fight is him picking his battles and getting ready for the midterm elections in November. Let’s just hope for the sake of the country that his strategy pays off.

As for stocks, the market definitely looks a lot healthier today than it did last week. However, that does not mean we are out of the selling woods just yet. I still think we can see a pullback here capable of retesting the February lows. Until we see the market reach escape velocity here, I’d advise a very cautious approach to equities.