Stocks rebound after Wall Street's sharp turnaround: Market recap

(Bloomberg) — A fresh wave of dip buying has spurred a rally in stocks after a roughly $6.5 trillion selloff that roiled markets around the world.

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All major groups in the S&P 500 advanced, with the index on track for its biggest gain since February. After bearing the brunt of the recent crisis, mega-cap stocks led gains Tuesday. After volatility gripped global markets early in the week, hedge funds stepped in to buy the dip in technology stocks, according to Goldman Sachs Group Inc. Just a day later, Wall Street’s fear index, the VIX, fell by the most since 1990.

Buying U.S. stocks after a drop of the magnitude seen last month has generally been profitable, according to Goldman Sachs. Since 1980, the U.S. benchmark index has generated a median return of 6% in the three months following a 5% decline from a recent peak. Quantitative strategists at JPMorgan Chase & Co. said institutional investors bought into the dip Monday, with about $14 billion purchased during trading hours and $6.7 billion sold by the close.

According to Quincy Krosby of LPL Financial, the market is oversold and is expected to rebound. The question now is whether the concerns that sent the market into a sell-off have subsided. Areas of volatility are likely to persist.

Demand for safe-haven assets has waned globally, and Treasuries have fallen. Traders are also expecting sharp cuts from the Federal Reserve. Swaps are pointing to an easing of about 110 basis points this year, down from 150 basis points on Monday.

The Fed is concerned about systemic risk in financial markets, not investor disappointment, said David Donabedian of CIBC Private Wealth U.S. So the Fed is unlikely to change course because of a stock market correction. Are we headed for a near-term recession or are markets overreacting? We think it’s slower growth, not a recession.

The S&P 500 index climbed 2% after its worst rout in about two years. Nvidia Corp. jumped 6%, leading the gain among chipmakers. The Bloomberg Magnificent Seven index gained 2.4%. The Russell 2000 of smaller companies gained 1.6%. Walt Disney Co. gained on plans to raise prices for its streaming services. Caterpillar Inc. said its annual profit will likely be higher than expected.

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Yields on 10-year Treasury notes jumped 10 basis points to 3.89%

CIBC’s Donabedian says volatility could persist for a while. But he thinks the secular bull market will ultimately continue. The easing of monetary policy in the coming months could also lead to a return to a more balanced tone in equity returns and a search for value beyond the Magnificent Seven, he noted.

Mark Haefele of UBS Global Wealth Management says volatility is likely to remain elevated in the near term. But we believe recession fears are overblown and investors should focus on deploying cash in quality fixed income, shifting equity allocations toward quality and diversifying portfolios across asset classes.

Lauren Goodwin of New York Life Investments said evidence contradicting the prevailing soft-landing theory has forced the market to catch up with reality, but there is not enough evidence to justify panic selling and an emergency acceleration of interest rate cuts.

According to Carol Schleif of BMO Family Office, the recent market pullback is a classic correction, following months of low volatility so far in 2024. The lack of volatility prior to the last few weeks is unusual, and our current correction is actually quite normal, especially in August, which is historically a volatile time for markets due to lower trading volumes and the summer slump.

Schleif cautions that even though the stock market has entered correction territory, it's generally wise to let some dust settle before investing new money, as there's a risk of getting your head cut off.

Long-term investors don't need to worry about short-term fluctuations, said Michael Sansoterra, chief investment officer at Silvant Capital Management.

It's good to have losses like this from time to time, he said. They keep investors honest.

There is at least one silver lining in this week's drama on Wall Street and beyond: Key defensive investment strategies are alive and well, restoring confidence in the hedges that have failed in recent years.

After failing to fulfill their role as a hedge during the inflation-driven debacle, Treasuries have rallied throughout the stock meltdown, pushing their 60-day correlation with the S&P 500 closer to negative territory that signals they are once again hedging stocks.

Main events of the week:

China's Trade and Foreign Exchange Reserves, Wednesday

U.S. Consumer Credit, Wednesday

Industrial production in Germany, Thursday

U.S. initial jobless claims on Thursday

Federal Councillor Thomas Barkin speaks on Thursday

China PPI, CPI, Friday

Some of the main movements in the markets:

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The S&P 500 was up 2% as of 1:28 p.m. New York time.

The Nasdaq 100 gained 2.3%

The Dow Jones Industrial Average rose 1.5%

The MSCI World Index rose 1.8%

The Bloomberg Magnificent 7 Total Return Index rose 2.4%

The Russell 2000 index rose 1.6%

Currencies

The Bloomberg Dollar Spot Index rose 0.2%

The euro fell 0.2% to $1.0925

The pound fell 0.6% to $1.2698

The Japanese yen fell 0.7 percent to 145.15 per dollar.

Cryptocurrencies

Bitcoin rose 4.4% to $56,805.88

Ether rose 3.5% to $2,523.06

Obligations

The yield on 10-year Treasury notes rose 10 basis points to 3.89%

Germany's 10-year yield rose one basis point to 2.20%

The UK 10-year yield rose five basis points to 3.92%.

Raw materials

West Texas Intermediate crude oil rose 0.9% to $73.61 a barrel

Spot gold fell 0.8% to $2,390.82 an ounce

This story was produced with assistance from Bloomberg Automation.

–With assistance from Robert Brand, Aya Wagatsuma, Rheaa Rao, and Isabelle Lee.

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