Dow Futures

The Dow Jones Industrials (INDEX: ^DJI  ) fell a whopping 1% today after Friday’s disappointing jobs report. The Nasdaq and S&P 500 are down by similar amounts.

Last week, we found out that the unemployment rate fell to 8.2% after the economy added 120,000 jobs in March. That may sound like a lot, but it’s actually the lowest number since October and barely enough to keep up with population growth. In fact, the labor force participation rate dipped 0.1% to 63.8%.

The stock market had been on a roll after months of strong reports, but Friday’s report has caused some to revisit their economic crystal balls.

Bears will point to the idea that unusually warm weather may have given the economy a boost in recent months and that the economy is now stalling. Either that, or given the stock rally, high gas prices on account of tensions with Iran, and the deepening European recession, the downside risks to stocks outweigh their upside potential in the near term.

Economically sensitive stocks like Bank of America (NYSE: BAC  ) and Caterpillar (NYSE: CAT  ) got the worst of it, plunging to the tune of 3.3% and 2%, respectively. Even Disney (NYSE: DIS  ) and United Technologies (NYSE: UTX  ) — which are only about half as volatile as the other two seesaws — got hammered today in general market mayhem.

But it’s still too early to say our gradual recovery is stalling. This was, after all, just one month’s worth of data. The numbers could end up being revised upwards, or it could have been a one-month blip. And the news wasn’t all bad — the underemployment rate, which includes workers who can only find part-time positions, has been declining, indicating that demand is increasing and companies are finally beginning to fill full-time positions.

What’s more, layoffs of government workers may finally be starting to slow down. Over the past few years, 700,000 government workers have lost their jobs — about 2.5% of all public-sector workers. Belt-tightening at the federal, state, and local levels is one of the reasons why this downturn has been so severe. At the point we’re at now (30 months) after the 1981, 1990, and 2001 recessions, public-sector employment grew 1% to 3%, whereas it’s fallen 2.5% since the end of ours.

Finally, for long-term investors looking for bargains, a stock market sell-off isn’t all bad news. Corporate earnings could continue to soar in spite of the economy, as they have done for the past few years. That could mean continued stock gains for investors.

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Other big news
Though the news from the Fed is no doubt the big force here, there are a few other things investors should be watching today.

• The Volatility S&P 500 (INDEX: ^VIX  ) is popping almost 11% right now. The measure is an oft-cited way to measure the implied volatility of the markets. At just 17, it is still way down from August, when the VIX crossed 45. As the VIX plunged, the Dow rose, bringing us to our current level. Many are looking at this pop as a sign that the multimonth run could be over with a pullback looming.
• The eurozone continues to rear its head as the specter haunting the markets. Spanish borrowing costs spiked at bond auctions, thus perpetuating the worry about continued debt crises. The Europe Sector Index (INDEX: ^XEX  ) dropped 3%, its biggest misstep of the year.

The losers
Some stocks take bad news worse than others. Today it’s year-to-date Dow starlets Bank of America (NYSE: BAC  ) and Alcoa (NYSE: AA  ) that are down the most on the Dow, recording 2.9% and 2.8% drops, respectively. Alcoa’s broad international exposure hurt it in 2011, so it’s no surprise that European worries would send it tumbling today. Though Bank of America is also down big, it’s still up 66% for the year, so I wouldn’t call this reason to worry.

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You can blame today’s big drop in the Dow Jones Industrials (INDEX: ^DJI  ) — at 160 points and counting as of 1:45 p.m. EDT — on several things, ranging from European fears and the Federal Reserve’s announcement yesterday to simply a tired market that’s soared so far this year. But an equally important question for many investors is what impact the Dow’s plunge will have on the bond market.

In recent months, the Dow’s rise has come at the expense of bonds. The 10-year Treasury yield (INDEX: ^TNX  ) has risen from 1.87% at the beginning of 2012 to as high as 2.4% last month, as improving economic conditions seemed to hint at a coming end to the Fed’s low rate policies. The jump in the 30-year Treasury yield (INDEX: ^TYX  ) was even more extreme, with rates rising from 2.89% to 3.49% at their highs last month. Yet throughout this period, short-term rates have hardly budged, with three-month Treasury bills staying under 0.1%.

But over the past two days, we’ve seen the bond market react differently to the Dow’s drops. Yesterday, bond yields rose even as stocks fell, with expectations that the Fed would let rates rise, driving the stock market’s decline. Today, though, bond yields are moving back down, presumably as investors look for safe havens to protect themselves from a stock market correction.

Meanwhile, European problems could have a direct impact on bonds. It was a poor auction of government debt from Spain that helped reawaken fears of a sovereign-debt crisis, and those problems could well persist for quite a while. Already, both Banco Santander (NYSE: STD  ) and National Bank of Greece (NYSE: NBG  ) are close to revisiting their recent lows as a result of those fears, and even French banks are coming under pressure. So far, U.S. bonds have been largely unaffected, but a full-blown financial crisis would likely push investors into the perceived safety of Treasuries even as European bonds lose value.

What’s next for bonds depends a lot on how the economy plays out. A stronger recovery should boost rates. But any unexpected weakness could bring rates back down, making money for bond investors.

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Mr. Market has been on one heck of a climb for the year. The Dow Jones Industrials Average (INDEX: ^DJI  ) is up almost 8% year to date, and has climbed from 12,700 to 13,289 in this month alone. Today’s down day seems more like a breather than anything else. That doesn’t mean there aren’t trends to watch though. Here is a look at how the three major indices fared today, the macro news moving markets, and the two Dow stocks that gained or lost the most today.

Global jitters
While Europe has been at the forefront of most investor’s global concerns, it looks like another region of the world has been building problems of their own. Today, it is slowdown fears in China that are sending chills. BHP Billiton, the world’s largest miner, said that iron ore demand from the country is “flattening.” Coupled with fears about an overinflated housing market in the country, it’s easy to see why shares would dip.

Worries from China pushed gold, oil, and silver funds lower today. The Market Vectors Oil Services ETF (AMEX: OIH  ) closed the day down 1.8%, more than three times the Dow’s fall. The U.S. Oil & Gas Exploration and Production Index Fund (AMEX: IEO  ) fell five times the loss on the Dow, with a 2.5% decline for the day. This makes sense, as oil and gas exploration tends to be the most boom-and-bust subsector of the oil and gas industry.

Specific pops & drops

• Bank of America (NYSE: BAC  ) was the top performing Dow stock of the day, rising 2.9%. This added to the company’s already ridiculous 76.4% year-to-date gain. It’s been a two-part push for the big bank: Originally they were buoyed by positive economic numbers, and then they built off that rise with positive stress-test results. It’s been a great year to be in banking stocks, and some Fools think Bank of America could be the Dow’s stop stock of 2012.
• Caterpillar (NYSE: CAT  ) was the biggest Dow loser today, falling 2.61%. The company has put up huge growth numbers recently, particularly with their emerging-market mining growth. It makes sense they would dip today on China growth fears, but with the equipment maker still up 23% for the year, today’s pullback isn’t anything to sweat over.

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A rising stock market continued to reflect the enthusiasm that investors have about the overall economy. Even though the Dow Jones Industrials (INDEX: ^DJI  ) finished up just 7 points, closing at 13,239, other parts of the stock market did much better. The small-cap Russell 2000 (INDEX: ^RUT  ) index jumped nearly 1%, and the Nasdaq and S&P also rose, but bond yields continued to climb as some now believe that the decades-long bull market in bonds is in danger of ending.

Some stocks didn’t get join in the fun on Monday. Let’s take a closer look at three of them.

Bank of America (NYSE: BAC  ) , down 2.7%
It would be easy to read something sinister into B of A’s performance today. But in reality, it’s probably just a break from the stock’s huge 2012 run.

Earlier today, B of A shares touched the $10 mark for the first time since last summer before falling back. For the stock to make further progress, it would be ideal for the company to show improvement in dealing with its legacy mortgage issues. Those are the biggest obstacles standing in the way of a full recovery for the bank.

Microsoft (Nasdaq: MSFT  ) , down 1.2%
Microsoft is giving up ground on a generally good day for tech stocks. But at least one analyst thinks this is a dip that investors should buy.

Hilliard Lyons stuck by its buy rating on Microsoft, raising its price target to $37 based on its expectation that Windows 8 will help the software giant integrate an ecosystem of its own. Between its Xbox game system, Office software, Bing search, and Windows Phone products, Microsoft has the capacity to build a one-stop experience. Whether it can execute or not remains to be seen … as the lack of interest in the shares today seems to suggest.

United Technologies (NYSE: UTX  ) , down 1.0%
I didn’t see any company-specific news pushing United Technologies down today. But one troubling trend could spell problems for the conglomerate and its defense-related segments going forward.

With Treasury yields on the rise, borrowing costs for the U.S. government could be in line to soar. That would put even more pressure on an already-burdened budget, which could prompt more defense cuts that could eventually hit United Tech and the defense contractors it does business with. Until the government can get its own balance sheet in order, rising rates will remain a threat.

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The stress tests are out. The results helped to send Bank of America (NYSE: BAC  ) up 22%, JPMorgan Chase (NYSE: JPM  ) up 9%, and the Dow Jones Industrials Average (INDEX: ^DJI  ) up 2% for the week.

JPMorgan received permission to increase its dividends and stock buybacks. Bank of America soared after it didn’t fail the tests. Of course, the test parameters focused on the results of hypothetical economic conditions, rather than worst-case losses from its legal challenges.

Of the 19 institutions tested, Citigroup (NYSE: C  ) , SunTrust, MetLife, and Ally Financial were the four to fail at least one scenario.

Too-big-to-fails Wells Fargo (NYSE: WFC  ) , Goldman Sachs (NYSE: GS  ) , and Morgan Stanley managed to stay above the 5% Tier 1 common equity threshold.

Despite lobbying from the banks to keep details of the results secret, the Federal Reserve went ahead and released lots of useful information. Here’s how the 19 fared:

The blue amounts are losses under the test’s scenario; red is how much capital would be left over after the carnage.

Although banks would take big losses on their mortgage, credit card, and commercial and industrial loans, the biggest source of losses would come result from trading and counterparties, which should remind us all that a strong Volcker Rule is so important.

Now, the test had its limitations. For one, the worst-case assumptions modeled a more severe recession than the one we just had — mortgage losses, high unemployment, gross domestic product decline, and low interest rates. Kudos for using much more stressful assumptions than in the flimsy 2009 tests. And given the liquidity trap we’re in, it makes sense that a hypothetical double-dip recession sometime over the next few years would be deflationary rather than inflationary, just like the last one. But hopefully in future tests we’ll also get to see how well banks would cope with alternative kinds of financial crisis. At the very least, it would be nice to see what affect moderately rising rates would have.

More importantly, as FDIC Chair Sheila Bair recently pointed out last week, the test looked at risk-based capital levels. Future versions of the test should look at overall leverage, too, since “risk-based” can be a somewhat squishy metric.

Furthermore, the tests, which focused on solvency, aren’t a guarantee that we won’t see another financial panic, with a shadow banking run once again crashing the entire system.

It’s encouraging to see banks performing decently under the tested scenarios, since solvency would decrease the odds that we’ll have to undergo another financial crisis and possible bailout during the next recession. But we still have a long way to go to protect ourselves from the next crisis.

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The Dow Jones Industrial Average (INDEX: ^DJI  ) is the most widely quoted measure of the U.S. stock market, yet it is terrible at its job. Read along and I’ll explain why the Dow is a poor measure of the U.S. market. I’ll also share a surprising stat that might change your mind on the state of the U.S. market and tell you how you can profit from all this.

The Dow
The Dow Jones Industrial Average is an index of just 30 stocks whose stated goal is “to provide a clear, straightforward view of the stock market and, by extension, the U.S. economy.” Started in 1896 by financial journalist Charles Dow, the Dow is weighted by the stock prices of its component companies and nothing else. To calculate, you simply add up the 30 stock prices and divide the total by the Dow Divisor. When the index was formed, the divisor was 30, but after 116 years of stock splits, dividend payments, and component changes, it currently stands at 0.132129493.

This method is a relic of the pen-and-paper times the Dow was invented in, when it was much too complicated to use the more rigorous methodologies of the S&P 500 or the Wilshire 5000. The simplistic weighting has led to ridiculousness such that IBM has more than twice the effect of ExxonMobil on the Dow, even though Exxon is nearly twice its size. The outsized effect of just a few stocks is a major problem, as many people’s perception of the state of the U.S. economy is based on the Dow.

The state of the market
After a crazy 2011, the Dow has been trending slowly upward and currently sits just barely above its 2008 level.

Dow Jones Industrials Stock Chart by YCharts

But is this truly the state of the market? In the late spring of 2009, Dow component General Motors (NYSE: GM  ) was on its way to bankruptcy, which meant it would have to be taken out of the index. Many people expected GM to be replaced with Apple (Nasdaq: AAPL  ) , as it was a tech bellwether. Instead, the Dow powers-that-be ended up choosing Cisco (Nasdaq: CSCO  ) in June 2009, and that’s how we have the Dow as we know it today.

The Dow that didn’t happen
It’s interesting to consider what could have been. Apple has been on a tear the past few years and has become the largest publicly traded company in the United States. Bespoke Investment Group crunched the data on what the Dow’s performance would look like if Apple had been included instead of Cisco.

Source: Bespoke Investment Group.

Source: Bespoke Investment Group.

Imagine how the market itself would be different had Apple been included. A few months ago, the Dow would have broken its all-time high of 14,164 and as of early February would have been at 14,636! Pundits would be screaming about how it is such a great time to invest. Dow Soars Above 14,000! Dow at an All-Time High! Dow 15,000! Companies would be hiring more people and buying back stock in droves as confidence grew with the rising stock prices.

Yet the fact that the Dow can be altered so heavily by just one stock is exactly why you shouldn’t rely on the Dow. It’s not just Apple that would have changed the Dow so mightily, either. The index also would have been way up had Ford (up 116%) or Amazon.com (up 140%) been included in place of General Motors since June 2009.

Bottom line
People pay attention to the Dow out of habit, as Dow Jones itself explains on its website:

The Dow Jones Industrial Average is the most-quoted market indicator in newspapers, on television, and on the Internet. Because of its longevity, it became the first to be quoted by other publications. This practice became habit when Wall Street earned at least a mention in the general news each day, and habit became tradition when the post-World War II bull market commanded the nation’s attention. The Industrial Average became the indicator to cite if you were citing only one.

Like cursive writing, the imperial measurement system (how many inches are in a mile again?), the QWERTY keyboard, and other terrible ideas we continue to use just out of habit, the Dow should be phased out of existence. There are better measures out there of the state of the market, like the S&P 500, that are less prone to the swings of just a few stocks.

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Today, Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) led the Dow Jones Industrials (INDEX: ^DJI  ) up 0.44%, to 13,252.76, and the broader banking sector helped lead the S&P 500 up 0.60% to close above 1,400 for the first time since 2008. 

The Federal Reserve’s announcement of banking “stress test” results on Tuesday has led to surging bank share prices. The KBW Bank Index is up 8.8% since Monday’s close, including a 2.7% rise today. Here’s how the six largest banks have done (note that all six were part of the 19-bank stress test):

Note that even Goldman Sachs, which has been dealing with the resignation letter from hell, is up. So is Citigroup, which failed one part of the stress test (but only because it got too aggressive in asking for higher dividends and share repurchases) and will have to resubmit its capital plan later this year.

Why has the market responded so favorably? I believe it’s because the stress tests weren’t the watered-down tests we’ve seen from the U.S. and Europe in the past. For its worst-case scenario, we’re talking 13% unemployment, a Dow that falls under 6,000, and a housing market that crashes 21%. Even in that scenario, every bank but Ally Financial exceeded the Fed stress-test minimum 5.0% Tier 1 common capital ratio, if dividends and share repurchases are restricted.

So you can thank the Fed for conducting a plausible stress test and publicizing the robust results bank-by-bank for this banking rally. In an industry with little balance-sheet visibility, this was a step in the right direction.

The Dow Jones Industrials (INDEX: ^DJI  ) is the one single measure of the stock market that the most people are familiar with. With its 30 component companies, the Dow has a manageable number of stocks while still representing most of the industries in the U.S. economy.

But because of a quirk in the way it’s calculated, the Dow doesn’t give every company the weight it deserves. Later in this article, I’ll talk about four companies that get short shrift from the Dow. But first, you need to understand why the Dow misses out on the full potential of some of its most promising companies.

Why the Dow has a weight problem
Behind every market benchmark is a set of procedures used to calculate it. The most important part of figuring out any index is determining how much weight to give to each of its component stocks.

Most market measures, including the S&P 500 and the Russell 2000, assign weights to their stocks based on market capitalization. So the stocks with the biggest market cap have the most influence on the index, while smaller stocks get less weight.

But the Dow is unusual in that it’s a price-weighted measure. So regardless of how big a company happens to be, the only thing that determines how much weight it gets in the Dow is what its share price happens to be. So stocks with high prices count the most in the Dow, while low-priced stocks have much less influence — even if their market caps happen to be extremely high.

4 stocks that you can’t ignore (even though the Dow does)
Unless you plan to invest directly in the Dow, though, its weighting mechanism isn’t important to you. You just want the best stocks you can find — regardless of their share prices. So I looked at four stocks that have plenty of potential but happen to have low-priced shares currently.

General Electric (NYSE: GE  )
Arguably the most diverse conglomerate in the U.S., GE has businesses that range from alternative energy and medical equipment to its now-minority interest in NBC Universal. GE fell out of favor during the financial crisis as its finance division suffered big losses that threatened the entire company.

Lately, though, GE has been firing on all cylinders. It’s working with a variety of partners on initiatives including health-care information technology sharing and LED production, and it also expects to expand its aviation business significantly this year. Yet with a share price of just $19, the stock has only about a 1% weighting in the Dow.

Intel (Nasdaq: INTC  )
This semiconductor giant has been successful for decades, riding on the surge in PC demand since the late 1980s. With in-house production facilities, Intel is insulated from third-party production problems that challenge some of its rivals.

With PCs giving way to mobile devices, Intel has had to answer a major threat. But with its Medfield mobile chip poised to find its way into tablets and smartphones later this year, Intel is positioning itself to join the mobile revolution. If it succeeds, then its roughly 1.5% weighting in the Dow won’t do the chip company justice.

Pfizer (NYSE: PFE  )
Pfizer has the largest market cap of any pure pharmaceutical company in the U.S., but by Dow standards, it gets almost no respect at all. It commands just a 1.25% weighting because of its share price around $21.50.

Like other pharma stocks, Pfizer is dealing with the setback of having lost patent protection on its blockbuster drug. But even with Lipitor open to generic competition, Pfizer has a reasonable pipeline of drugs to work on. Given the company’s huge size, Pfizer is in a much stronger position to bolster its future prospects than many of its peers.

Cisco (Nasdaq: CSCO  )
Cisco went through a rough patch a few years ago. Competitors seemed to gain the upper hand, and Cisco’s customer base of government agencies found itself facing big cash crunches that hamstrung IT spending. Moreover, the company made some mistakes with its failed foray into consumer electronics as it failed to defend its core business.

But more recently, Cisco has gotten its act together. With a narrowed focus that goes back to the company’s roots, Cisco’s share price has climbed steadily since the middle of 2011. But even with its gains, the stock makes up only about 1.2% of the Dow — less than a tenth of IBM‘s influence on the average.

Get built
The Dow is only as good as its component stocks, and sometimes, the Dow’s methodology obscures its best companies. Be sure to look beyond the Dow average itself to find its most promising stocks.

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Good news seemed to be everywhere, with Greek optimism over an accord to reduce the amount outstanding on its sovereign debt combining with a strong U.S. jobs report to generate optimism. Closing the week, the Dow Jones Industrials (INDEX: ^DJI  ) rose modestly, finishing up 14 points, to 12,922. The S&P 500 (INDEX: ^GSPC  ) climbed 5 points to finish at 1,371.

Still, not every stock joined the party. Here are three that posted some substantial losses on the day.

Hewlett-Packard (NYSE: HPQ  ) , down 1.9%
HP has a daunting task ahead of it: not just to define what it wants its new role in the technology industry to be, but also to make it actually happen. Today, a report from the New York Times revealed one part of HP’s strategic plan — building up its cloud-computing services.

With Amazon.com already delivering cloud services, HP certainly doesn’t have free rein to take over the industry. But with an emphasis on higher-value premium tools and applications over simply commoditized offerings, HP hopes to make the business less about competing on cost — where it would likely lose to Amazon — and more about providing a full-service experience.

If that works, then it could be one key to HP’s recovery. But based on investor reaction, HP faces a lot of skepticism.

Boeing (NYSE: BA  ) , down 1.1%
Boeing has a lot going on today. On one hand, the aerospace giant is competing well against Europe’s Airbus, with a huge edge in orders so far this year. Moreover, airline United Continental said that it managed to finance its order for Boeing 787 Dreamliners through the bond market, marking the first time an airline has sold bonds to fund a Dreamliner purchase.

But, according to Reuters, the World Trade Organization said that Boeing has benefited from billions of dollars in unfair subsidies. The ruling would rekindle a long dispute between Boeing and Airbus, both of which have had to defend against allegations of subsidies. The U.S. has pushed for sanctions of $7 billion to $10 billion against the European Union for its alleged aid to Airbus. If the WTO’s formal report due later this month confirms the Reuters report, then Boeing could face a long, drawn-out process that could distract from its core mission of getting its big backlog of orders filled.

ExxonMobil (NYSE: XOM  ) , down 0.6%
The tug of war between Big Oil and the government continues. Today, Exxon CEO Rex Tillerson said that although it needs government to help it develop many sources of energy, the best way the government can help companies innovate is by supporting research rather than using taxes and subsidies to cherry-pick certain portions of the industry.

Despite today’s small drop, if energy demand continues rising — and, with signs of economic strength, that seems likely — then Exxon should be poised to do well for the foreseeable future. Even with a possible short-term production slowdown, the long-term prospects for Exxon seem better than ever.

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Well, any thoughts that we’d make it through 2012 without a big down day got quashed today, as the stock market finally posted a major decline. The Dow Jones Industrials (INDEX: ^DJI  ) closed down 204 points, to 12,759, its first triple-digit loss of the year. The S&P 500 (INDEX: ^GSPC  ) also dropped sharply, falling 21 points, to 1,343, for its biggest single-session loss of the year.

I could find three Dow stocks that rose today, but some stocks held up a lot better than others. Let’s take a closer look at three of the better-performing stocks in the Dow today.

Intel (Nasdaq: INTC  ) , up 0.2%
Most people don’t see technology stocks as being particularly defensive. But good news can push a stock up, and that may be what helped Intel end up as the Dow’s single gainer today, with a small rise.

Intel released the latest version of its Xeon chip for servers today. The server chip is aimed squarely at the cloud-computing market, with better performance and greater energy efficiency than its previous offerings. With server manufacturers expected to get onboard with server platforms using the chips, the move should bolster Intel’s strength in the server-chip market against its rivals.

McDonald’s (NYSE: MCD  ) , down 0.1%
Big stock drops don’t scare McDonald’s investors. In case you don’t remember, the fast-food giant was one of the few stocks that managed to post a gain in the bear market year of 2008, when the S&P fell 37%.

Of course, with a big part of McDonald’s growth prospects coming from China, news of a potential slowdown in the economy of the world’s most-populous nation could have an impact on the company going forward. But if China follows through with plans to focus on developing a stronger internal consumer base for its economy, then the move could actually help McDonald’s — by giving it a better-developed market to serve.

Procter & Gamble (NYSE: PG  ) , down 0.2%
It’s not uncommon to find companies in defensive industries like consumer staples among top performers in down markets. P&G certainly meets the definition, with its strong stable of high-value brands commanding a presence in millions of households.

Today, the company once again was named as one of the most-admired businesses in the world, by Fortune magazine. Although P&G dropped from No. 5 last year to No. 9 this year, its ability to adapt to challenging markets and deal with the need to cut costs gave it the top rank in its industry.

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This week, the Dow Jones Industrials (INDEX: ^DJI  ) eclipsed 13,000 for the first time since May 2008, while the Nasdaq (INDEX: ^IXIC  ) broke through 3,000 for the first time in 11 years. A short time after hitting its milestone, however, the Dow retreated and finished about even for the five trading days. Immediately, headlines emerged claiming there was a psychological barrier weighing down the index at this level, that “some investors are worried about Dow 13,000.”

Why would that be the case? At this point, it’s unclear. After all, the Dow tracks the biggest, most financially stable companies, serves as a leading indicator for the economy, and has risen nearly 100% since hitting a 12-year low of 6,547 on March 9, 2009. Sure, on Wednesday, Ben Bernanke outlined a continued sluggish economic recovery, but for the most part the Federal Reserve chairman was optimistic about the United States and a gradually declining unemployment rate.

Perhaps more importantly, in his shareholder letter this week, the Oracle of Omaha, Warren Buffett, outlined an economy that was getting back on track. He even noted that the housing market would rebound as the supply-and-demand picture reversed course. In Buffett’s words:

Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while “doubling-up” may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.

Bernanke didn’t phrase it in those terms, but Buffett never fails to get down to the brass tacks of the matter. After all, what twentysomething living on a futon wants a curfew?

Besides housing, however, Buffett shed some light on another sector that has been off limits for many investors over the past few years: banking. Coincidentally, Buffett’s endorsement of the banking sector might have bolstered the shares of JPMorgan Chase (NYSE: JPM  ) and Bank of America (NYSE: BAC  ) during the week. These two stocks were the biggest gainers on the Dow, while another Buffett bank holding was right there with them.

What did Buffett have to say about his bank holdings? Well, generally, that he likes them.

Specifically, he praised Jamie Dimon’s leadership at JPMorgan, noting that Dimon’s shareholder letter was one of his favorite reads. Buffett also pointed out that Bank of America has made excellent progress in cleaning house, fixing up its balance sheet, and nurturing a huge and attractive underlying business that will endure long after today’s problems are forgotten. Finally, Buffett waxed poetically about the “wonderful business” at Wells Fargo, a company so exceptionally managed that Buffett once claimed he would bet his entire net worth on its stock.

Buffett’s been known for marching boldly into the fray, and perhaps investors should quit dilly-dallying and jump on the bandwagon. While these Dow stocks attracted his interest, there’s another undervalued company Buffett would love to get his hands on if he could. Discover a stock that you can buy now but is too small for Buffett. Find out more in our free report, “The Stocks Only the Smartest Investors are Buying.” Considering the broad rebound in the banking sector, this opportunity to get in on the ground level is too enticing to pass up.