Dow Today – Stocks stage dramatic late-session rebound after S&P 500 skids into correction territory
Stocks staged a dramatic, late session recovery Monday in a volatile session that had earlier sent the S&P 500 index into correction territory and Canada’s benchmark stock index to below 20,000 for the first time since July of last year.
Escalating tensions between Russia and Ukraine, and general nervousness about looming interest rate hikes by the U.S. Federal Reserve and other central banks, was widely blamed on the early selloff that saw the Dow Jones Industrial Average careen to more than a 1,000-point loss. But, starting at midday, bargain hunters made a return after earlier showing reluctance to step in. By the close, all three U.S. indexes were in positive territory, while the TSX ended with only a modest loss.
Such a late-day reversal is often perceived as a bullish signal, igniting some thoughts that markets could continue to recover from here. Last week, the S&P 500 and the Nasdaq suffered their largest weekly percentage plunge since March 2020, when shutdowns to contain the pandemic sent the economy spiraling into its steepest and most abrupt recession on record.
“I would not be surprised if today is the low point for the major averages,” said Sam Stovall, chief investment strategist of CFRA Research in New York.
The U.S. Federal Reserve is due to convene its two-day monetary policy meeting on Tuesday, and market participants will be parsing its concluding statement and Chairman Jerome Powell’s subsequent Q&A session for clues as to the central bank’s timeline for hiking key interest rates to combat inflation.
“I think investors are over-assuming a very hawkish stance by the Fed,” Stovall said. “Granted, inflation is high and is likely to get higher before it starts to decline. Specifically we see the headline CPI topping at 7.3 per cent for both January and February, but then coming down to 3.5 per cent by year-end.”
JPMorgan analysts in a midday note echoed the thinking that stocks were ripe for a rebound: “Recent bearishness in equities is overdone, and out of line with activity momentum, easing bottlenecks, and what we expect to be a strong earnings season,” wrote JPMorgan analysts in a midday note.
Still, with valuations still near historical highs – particularly for U.S. stocks which have gained 14 per cent over the past year, investors remain on guard over further pullbacks.
“There’s plenty of froth to skim off the market, and this is a clear example of how too-stimulative for too-long policy comes back to bite,” said Robert Kavcic, senior economist with BMO, in a note. “We believe the economic backdrop is solid, which should eventually put a floor under the market and the quality names.”
In a sign that geopolitical tensions are heating up, NATO announced it was putting forces on standby to prepare for a potential Russian invasion of Ukraine.
The threat of potential conflict in that region helped U.S. Treasury yields dip, pausing their recent upward climb, which has pressured stocks in recent months.
Meanwhile a report from IHS Markit gave evidence that surging infections of the Omicron COVID variant have caused a marked deceleration of business activity in the United States.
The Toronto Stock Exchange’s S&P/TSX composite index ended down 50.09 points, or 0.2 per cent, at 20,571.30, its lowest closing level since Dec. 20.
The Toronto market gained 22 per cent in 2021, its best yearly performance since 2009, but has since been pressured by the prospect of faster U.S. rate hikes. The Bank of Canada is also expected to begin tightening, with the first move potentially coming at a policy announcement on Wednesday.
The TSX closed well above an intraday low of 19,912.59. It was helped by a rally in technology shares, including a 7 per cent gain for Shopify Inc as the company proposed changes to its fulfillment network.
The S&P 500 earlier came close to confirming a correction by appearing on track to close more than 10 per cent down from its most recent all-time high reached on Jan 3.
The S&P 500 recovered 4.3 percentage points from its session low to its closing level, the largest such swing since March 26, 2020, when Wall Street was bouncing back from the global slump caused by the coronavirus pandemic. Earlier in the day, the indexes were all more than 2 per cent lower.
“Correction territory is often a psychological sweet spot for investors. They see the correction, and they see that it’s a healthy part of the markets,” said Jake Dollarhide, chief executive officer of Longbow Asset Management in Tulsa, Oklahoma.
“When everything started selling off, that got a lot of people’s attention, so I think we had what I would call intraday capitulation, getting some of this easy money out of the market,” Dollarhide added.
All 11 major sectors of the S&P 500 spent most of the trading day deep in red territory, but by market close all but three were green. Consumer discretionary enjoyed the largest percentage gain.
Fourth-quarter reporting season is in full swing, with 65 of the companies in the S&P 500 having posted results. Of those, 77% have come in above expectations, according to data from Refinitiv.
On aggregate, analysts now see S&P 500 annual EPS growth of 23.7%, per Refinitiv.
A series of disappointing earnings from big banks and, notably, lockdown darling Netflix Inc have overshadowed many better-than-expected results.
Shares of International Business Machines gained more than 6% in after-hours trading after the company beat revenue expectations on the strength of its cloud and consulting businesses.
In Toronto, energy shares fell 1.5 per cent, pressured by a drop in oil prices. U.S. crude prices settled 2.2 per cent lower at US$83.31 a barrel.
Heavily weighted financial shares lost 0.8 per cent, while the materials group, which includes precious and base metals miners and fertilizer companies, also ended 0.8 per cent lower.
With files from Reuters
With files from Reuters
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