Stocks bounce back from massive selloff
The S&P 500 recorded its best day in nearly four months as investors rushed to buy stocks that had been reversed in Monday’s sell-off.
The rally suggested that while the fast-spreading Delta variant of the coronavirus casts a shadow over the economic outlook, many investors still see few attractive alternatives to equities.
The benchmark stock index gained 64.57 points, or 1.5%, to 4,323.06, marking its biggest single-session gain since March 26 and nearly erasing Monday’s 1.6% drop. The Dow Jones Industrial Average climbed 549.95 points, or 1.6%, to 34,511.99, and the tech-rich Nasdaq Composite added 223.89 points, or 1.6%, to 14,498.88 .
All three indexes are within 2% of their July 12 highs, underscoring the strength of the recovery that fueled equity markets in the first half of the year. The S&P 500 climbed 15% in 2021 and the Dow industry added 13%. In a low interest rate environment, these returns are hard to resist for many investors.
“In a lot of our conversations with our clients, people were really trying to find time to put money to work,” said Mike Stritch, Chief Investment Officer, BMO Wealth Management. “People are stepping in and they don’t want to get caught missing out on an opportunity to buy a few points lower. “
Stocks, bond yields and oil prices fell on Monday as investors focused on the potential of the Delta variant, rising inflation and strained U.S.-China relations to weigh on the global economic recovery. An increase in coronavirus cases in many parts of the world could threaten the pace of economic growth, while a rise in consumer prices could cause the Federal Reserve to reverse its easy money policies sooner than expected.
Some of those worries seemed to dissipate on Tuesday. The stock market’s gains were widespread, with 447 components of the S&P 500 rising, according to Dow Jones Market Data. Ten of the eleven sectors of the S&P 500 are up, led by industrial and financial groups, which had behaved badly the day before. Industrials gained 2.7% on the industry’s best day since November 2020.
Small business stocks, which tend to be sensitive to the strength of the economy, beat their larger counterparts on Tuesday. The Russell 2000 Small Cap Index rose 3% for its best day since March 1.
Travel stocks were among the best performers on the day, suggesting that many investors reconsidered Monday’s fears that the Delta variant would disrupt the continued economic reopening. Shares of American Airlines Group gained $ 1.59, or 8.4%, to $ 20.56, while shares of Norwegian Cruise Line Holdings climbed $ 1.81, or 8.3%, to $ 23.68.
“People are extrapolating, thinking there will be behavioral changes, there might be new blockages,” said Jimmy Chang, chief investment officer for the Rockefeller Global Family Office. “Yesterday could have been a crescendo in this fear, and maybe today some realized that maybe it wasn’t that bad.”
One factor that could support further equity gains is improving expectations for corporate earnings. The forecast has risen since the start of the earnings season last week, with analysts now forecasting S&P 500 company profits to rise 70% in the second quarter from a year earlier, at a time when a large part of the economy had been crippled by the pandemic. With around 11% of S&P 500 companies reporting, investors will be analyzing the results in the days and weeks to come.
“You really need the fundamentals, the earnings, to really bounce back, and that’s really what we’re seeing,” said Larry Adam, chief investment officer at Raymond James. “If you get that momentum, then people worry less about ratings.”
Stocks trade at higher multiples of their projected earnings than the long-term average. If earnings continue to beat expectations, it would make stocks cheaper at current prices.
Among individual stocks, shares of HCA Healthcare climbed $ 31.27, or 14%, to $ 248.90, a new all-time high, after the healthcare operator saw a sharp rebound in earnings for the second quarter and raised its earnings forecast.
Shares of Netflix fell 1.9% in after-hours trading, as the streaming giant continued to experience slower growth in new subscribers. The company said it added 1.5 million memberships in the second quarter, beating its previous forecast of one million memberships, but well below the 10 million added during the same period last year, when ‘much of the world was in lockdown mode.
In bond markets, the yield on the benchmark 10-year US Treasury bond edged up to 1.208%, after falling to 1.181% on Monday in its largest single-day decline since March. Yields rise as bond prices fall.
Oil prices edged up after falling a day earlier over concerns that Covid-19 could once again dampen energy demand. Brent crude rose 1.1%, after falling 6.8% on Monday in its worst daily percentage performance since March.
“We sometimes forget that when we’ve had periods of really strong performance and low volatility, the little bumps in the market make it look like they’re bigger than they are,” said Shaniel Ramjee, manager of multi-asset funds at Pictet Asset Management.
Overseas, the pancontinental Stoxx Europe 600 rose 0.5%. In Asia, most major benchmarks extended Monday’s declines. The Shanghai Composite Index fell 0.1% and the Hong Kong Hang Seng fell 0.8%.
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