S&P 500 Rises 1% After Monday Rout

Japan equities are set to regain some ground after suffering the biggest hit in Monday’s global rout, which wiped out billions across markets from New York to London. US equity futures climbed in early trading.

Rita Nazareth

07 Aug 2024, 06:21 AM IST

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(Bloomberg) -- A renewed wave of dip buying spurred a rebound in stocks after a roughly $6.5 trillion selloff that shook markets around the globe.

All major groups in the S&P 500 rose, with the gauge climbing 1% as buyers scooped up bargains after a plunge that sent the market to “oversold” territory. Buying shares after a slump of the scale witnessed over the past month has usually been profitable, according to Goldman Sachs Group Inc. strategists. Since 1980, the US benchmark has generated a median return of 6% in the three months that followed a 5% decline from a recent high.

Wall Street’s “fear gauge” — the VIX — saw its biggest plunge since 2010.

“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 — with the rise in yields helping smooth a $58 billion auction of three-year notes in afternoon trade. Traders are also moderating expectations of deep Federal Reserve rate cuts this year. Swaps point to around 105 basis points of easing, 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 US. “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 rose to 5,240. Nvidia Corp. jumped 3.8% to lead gains in chipmakers. Both the “Magnificent Seven” gauge of megacaps and the Russell 2000 of small firms added 1.2%. In late trading, Airbnb Inc. slid on a soft outlook. Super Micro Computer Inc. gave a solid sales forecast as corporations invest in the equipment required to run advanced artificial-intelligence tasks.

Treasury 10-year yields jumped 10 basis points to 3.89%. The Japanese yen slipped after a recent surge that saw an unwind of popular carry trades. Bitcoin climbed. Oil bounced back from a seven-month low.

A semblance of calm returned to markets, following a pullback fueled by weak economic data, underwhelming tech results, stretched positioning and poor seasonal trends. The wall of worry the market built up over the past few days drove the S&P 500 to the brink of a correction, with a drawdown of about 8.5% from the highs.

While such sharp declines in equity prices are concerning, historic data show “dips, pullbacks and corrections of 10% or more” are a normal and healthy part of any bull market, according to George Smith at LPL Financial.

Roughly 94% of the years since 1928 have experienced a pullback of at least 5%, and 64% of years have had at least one 10% correction, he noted.

“We believe that how common these occurrences are should provide comfort to equity investors, allowing them to be patient, stay invested, and most importantly, to not panic,” Smith said.

Source: LPL FinancialSource: LPL Financial

There have been 354 such days since 1928 when the S&P 500 was down 3% or more, and the average (and median) three-month, six month and one year forward returns are all higher than long-term averages, Smith at LPL noted.

“Excesses are burned off. It doesn’t feel good, but it’s a healthy part of the process,” said Ben Kirby at Thornburg Investment Management.

Donabedian at CIBC says volatility may persist for a while. But ultimately, he believes the secular bull market will continue.

“Corrections happen. Even in the best of times, stock prices do not go up in a straight line,” he noted. “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.”

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.

Source: LPL FinancialSource: LPL Financial

“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.”

“Get used to the volatility,” said Savita Subramanian at Bank of America Corp. “The best hedge is owning high quality stocks (we use earnings and dividend stability as our key measure). Market tranches based on quality have a well-behaved relationship with the VIX - the highest quality stocks tend to outperform as the VIX rises while the lowest quality stocks tend to lag the most.”

Long-term investors don’t need to worry about short-term gyrations, said Michael Sansoterra at Silvant Capital Management.

“It’s good to have these washouts on occasion,” he said. “They keep investors honest.”