Stocks moved sharply higher on Monday, as weeks of beaten down prices finally attracted some buyers. Yet, even with yesterday’s sizable gains, the Dow and S&P are still in correction territory (defined as a decline of more than 10% from a recent high) while the NASDAQ is officially in a bear market, having fallen more than 28% from its all-time high.
While the relief rally was welcomed by investors, the road ahead is still fraught with uncertainty. Inflation, which is running at multi-decade highs, is taking a large toll on consumers and corporations alike, with both cutting back on spending and investments. The Federal Reserve, through short-term interest rate hikes, is attempting to slow down demand in an effort to get rising prices under control. The problem is, if the central bank goes too far or too fast, there’s the risk of sending the economy into a recession. Meanwhile, geopolitical uncertainties presented by Russia’s ongoing assault on Ukraine, and COVID-19 lockdowns in China, make the task an even more difficult one for the Fed, as additional supply shortages add fuel to the inflation fire.
As the battle between inflation and rising interest rates plays out, volatility is likely to remain elevated in the quarters ahead. Historically speaking, however, stocks tend to fall in market value as interest-sensitive fixed-income securities rise. The yield on 10-year Treasuries, often viewed as a benchmark for borrowing costs, started the year around 1.5%, was at 2.86% Monday. Since then, the Dow has posted eight straight weeks of losses (the most in nearly 100 years), while the S&P and NASDAQ have posted seven down weeks (both worst since 2001).
All told, the Dow Jones Industrial Average gained 618 points yesterday, or just under 2%. Top advancers that fueled the increase included Goldman Sachs (GS) up 9.8%, Visa (V) up 8.5%, and Microsoft (MSFT) up 8.1%. The S&P 500 rose 72 points (1.6%), and the tech-heavy NASDAQ advanced 180 points, or 1.6%. All of the major market sectors ended the day firmly in positive territory, with the largest gains coming from financials (3.2%), energy (2.7%), and technology issues (2.4%). Elsewhere, the price of West Texas Intermediate was little changed, at about $110.30 a barrel.
Looking ahead to the new day, U.S. stock futures are suggesting the major indexes will start today’s session sharply to the downside. Elsewhere, Asian markets posted losses overnight, while stocks in Europe are also trading in negative territory. Meanwhile, oil futures are up slightly, to around $110.45 a barrel.
On the economic calendar this week, the Commerce Department’s report on new home sales for April will be released this morning, with the seasonally adjusted annual rate (SAAR) expected to decelerate modestly, to around 750,000 units. Tomorrow will see the release of the minutes of the latest FOMC (Federal Open Market Committee) meeting, which will be pored over for any further clues on the lead bank’s next steps. Thursday brings us the latest figures on initial and continuing jobless claims, as well as the pending home sales index for April. Lastly, on Friday we’ll get April’s readings on personal consumption expenditure (PCE) inflation and nominal consumer spending and personal income, among other reports.
– Mario Ferro
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
