(Bloomberg) -- A renewed wave of dip buying spurred a rally in stocks after a roughly US$6.5 trillion selloff that shook markets around the globe.
All major groups in the S&P 500 rose, with the gauge set for its biggest advance since February. After bearing the brunt of the recent meltdown, megacaps led gains on Tuesday. After volatility gripped global markets to start the week, hedge funds stepped in to buy the dip in tech shares, according to Goldman Sachs Group Inc. Just a day later, Wall Street’s “fear gauge” — the VIX — tumbled the most in data going back to 1990.
Buying U.S. shares after a slump of the scale witnessed over the past month has usually been profitable, according to Goldman Sachs. Since 1980, the U.S. benchmark has generated a median return of six per cent in the three months that followed a five per cent decline from a recent high. Quantitative strategists at JPMorgan Chase & Co. said institutional investors had bought the dip Monday, with about $14 billion purchased during market hours and $6.7 billion sold at the close.
“The market by any metric is ‘oversold’ and due for a bounce,” said Quincy Krosby at LPL Financial. “The lingering question now is whether the concerns that pushed the market into a cascade of selling are alleviated. Pockets of volatility are expected to continue.”
As demand for haven assets waned globally, Treasuries fell. Traders are also rowing back on expectations of deep cuts from the U.S. Federal Reserve. Swaps point to about 110 basis points of easing through this year, compared to as much as 150 basis points on Monday.
“The Fed worries about systemic risk in financial markets, not disappointed investors,” said David Donabedian at CIBC Private Wealth U.S. “Thus, the Fed is unlikely to change its course of action due to a stock market correction. Are we headed for a near term recession, or are markets overreacting? We believe slower growth is unfolding, not a recession.”
The S&P 500 climbed two per cent after its worst rout in about two years. Nvidia Corp. jumped six per cent to lead gains in chipmakers. The Bloomberg “Magnificent Seven” index rose 2.4 per cent. The Russell 2000 of small firms added 1.6 per cent. Walt Disney Co. gained on plans to raise the prices of its streaming services. Caterpillar Inc. said its annual profit will probably be higher than previously expected.
Treasury 10-year yields jumped 10 basis points to 3.89 per cent.
Donabedian says volatility may persist for awhile. But ultimately, he believes the secular bull market will continue. As easier monetary policy takes hold in the months ahead, it may also unleash a more balanced tone to equity returns, and the search for value beyond the Magnificent Seven, he noted.
“Volatility is likely to remain high in the near term,” said Mark Haefele at UBS Global Wealth Management. “But we believe recession fears are overdone, and that investors should focus on deploying cash in quality fixed income, tilting equity allocations toward ‘quality’ stocks, and diversifying portfolios across asset classes.”
To Lauren Goodwin at New York Life Investments, evidence against the prevailing “soft landing” view has forced the market to catch up to reality, but there’s not enough evidence to merit panic selling and an emergency acceleration of interest rate cuts.
“We would characterize the recent market pullback as a textbook correction, after months of low volatility so far in 2024,” said Carol Schleif at BMO Family Office. “The lack of volatility before the past few weeks is unusual, and our current correction is actually quite normal, especially during August, which historically is a volatile time for markets given lighter trading volumes and the summer doldrums.”
Schleif warns that while the equity market came to correction territory, it’s typically wise to let a bit of dust settle before putting new money to work as there is risk of “catching a falling knife.”
Long-term investors don’t need to worry about short-term gyrations, said Michael Sansoterra, chief investment officer at Silvant Capital Management.
“It’s good to have these washouts on occasion,” he said. “They keep investors honest.”
There’s at least one silver lining from this week’s drama on Wall Street and beyond: Key defensive investing strategies are alive and well — restoring faith in hedging trades that have misfired in recent years.
After failing to live up to their protective mission in the inflation-driven rout, Treasuries have rallied throughout the stock meltdown, taking their 60-day correlation with the S&P 500 ever closer to the negative territory that signals they’re hedging equities again.
Key events this week:
• China trade, forex reserves, Wednesday
• U.S. consumer credit, Wednesday
• Germany industrial production, Thursday
• U.S. initial jobless claims, Thursday
• Fed’s Thomas Barkin speaks, Thursday
• China PPI, CPI, Friday
Some of the main moves in markets:
Stocks
• The S&P 500 rose 2% as of 1:28 p.m. New York time
• The Nasdaq 100 rose 2.3%
• The Dow Jones Industrial Average rose 1.5%
• The MSCI World Index rose 1.8%
• 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 British pound fell 0.6% to $1.2698
• The Japanese yen fell 0.7% to 145.15 per dollar
Cryptocurrencies
• Bitcoin rose 4.4% to $56,805.88
• Ether rose 3.5% to $2,523.06
Bonds
• The yield on 10-year Treasuries advanced 10 basis points to 3.89%
• Germany’s 10-year yield advanced one basis point to 2.20%
• Britain’s 10-year yield advanced five basis points to 3.92%
Commodities
• West Texas Intermediate crude rose 0.9% to $73.61 a barrel
• Spot gold fell 0.8% to $2,390.82 an ounce
This story was produced with the assistance of Bloomberg Automation.
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