U.S. stocks closer higher on Tuesday after a three-day holiday weekend, following the worst weekly performance for equities in more than two years.
- The Dow Jones Industrial Average DJIA, +2.15% rose 641.47 points, or 2.2%, ending at 30,530.25.
- The S&P 500 SPX, +2.45% gained 89.95 points, or 2.5%, to close at 3,764.79.
- The Nasdaq Composite COMP, +2.51% rose 270.95 points, or 2.5%, to finish at 11,069.30.
Last week was the worst for the S&P 500 index since the stretch ending March 20, 2020, when the U.S. was first battling the coronavirus pandemic. The Dow Jones Industrial Average ended last week with a loss of 4.8%, the S&P 500 dropped 5.8% and the Nasdaq Composite dropped 4.8%.
What drove markets
Investors have been focusing on the surge in inflation which has led the Federal Reserve and other central banks to raise interest rates, as well as on the war in Ukraine that has crippled grain exports and triggered sanctions on energy exporter Russia.
“The risks of a recession are rising, while achieving a soft landing for the U.S. economy appears increasingly challenging,” said Mark Haefele, chief investment officer for global wealth management at UBS.
Haefele said UBS reduced its earnings estimate for S&P 500 index companies for next year by 2% and cut its estimate of forward price-to-earnings to 16.6 from 17.9.
Some questioned whether stocks could manage a sustainable rebound at this point, considering the paucity of new signals about the inflation outlook, or the underlying growth picture, that could trigger a meaningful shift in investors’ expectations about the pace of the Fed’s quantitative tightening.
“After what was a horrific week almost uniformly across equity markets, not just in the U.S. but across the world, the market was ripe for a counter rally from deeply oversold conditions,” said Mark Luschini, chief investment strategist at Janney Capital Management. “But the question on everybody’s mind is sustainability, since nothing has really changed.”
“What you can’t trust on days like this is just the machines running on price points…it’s not really based on anything fundamental,” he added.
The latest update of Fed policy maker forecasts released last week, known as the dot plot, sees an additional 175 basis points of rate hikes, taking the Fed funds rate to 3.8%, over the next 18 months, which would likely push the unemployment rate up from 3.6% to 4.1%, said Seema Shah, chief global strategist at Principal Global Investors, in a note.
Principal sees policy rates rising to 4.25% by mid-2023. This additional tightening could see unemployment rising above the Fed’s forecast, further raising the odds of recession, Shah said.
“Global central banks have clearly asserted that price stability sits above economic growth in their priority list, triggering major market upheaval. Against this painful backdrop, it becomes particularly important for investors to shift their equity and fixed income exposures towards quality and stability, while increasing their allocation to real assets, such as infrastructure and commodities, which still have some runway for potential outperformance,” she wrote.
Meanwhile, President Joe Biden said Monday that he will decide by the end of the week whether to order a holiday on the federal gasoline tax, as he also said a U.S. recession was not inevitable. Biden spoke with former U.S. Treasury Secretary Larry Summers, who said the jobless rate needs to spike to lower inflation.
A brutal selloff for crypto assets relented over the weekend, with the price of bitcoin BTCUSD, -1.61% up 2.1% near $21,100 after dipping below the $18,000 threshold for the first time since December 2020.
In U.S. economic data, existing-home sales fell 3.4% to a seasonally adjusted annual rate of 5.41 million in May, the National Association of Realtors said Tuesday. Compared with May 2021, home sales were down 8.6%. The decline was in line with the forecast of economists polled by the Wall Street Journal.
Looking ahead, investors are expecting to hear more from Fed President Jerome Powell when he testifies before the Senate Banking Committee on Wednesday.
Overall, it was a strong session for both value and growth stocks as investors witnessed risk assets bouncing back. Tuesday marked the first time since May that both S&P 500 Value and S&P 500 Growth indexes gained more than 2% on the same day, and only the third time since 2020 that both indexes rallied as much.
Companies in focus
- Shares of Kellogg Co. K, +1.95% rose 2% after the food company announced a plan to split into three businesses.
- Lennar Corp. LEN, +1.58% shares rose 1.6% after the homebuilder reported fiscal second-quarter profit, revenue and new orders that beat expectations, with gross margins improving despite higher materials and wage costs.
- JetBlue Airways Corp. JBLU, -1.64% continued its quest to buy Spirit Airlines Inc. SAVE, +7.94%, increasing its offer and strengthening its commitment to divest itself of assets to get regulatory approval for the deal. JetBlue increased its offer to $33.50 in cash per Spirit share, up from a previous offer of $31.50. Spirit is considering whether to proceed with a planned acquisition by Frontier Group Holdings Inc. ULCC, +1.61% ULCC or to accept JetBlue’s offer. Spirit shares rose 8%, while JetBlue shares were down 1.6% and Frontier shares gained 1.6%.
- Tesla shares TSLA, +9.35% leapt 9.4% higher as Tesla CEO Elon Musk announced job cuts.
- After declining for three straight sessions, the yield on the 10-year Treasury note TMUBMUSD10Y, 3.265% rose 6.6 basis points to 3.304%, its biggest jump in seven days. Yields and debt prices move opposite each other.
- The ICE U.S. Dollar Index DXY, +0.27%, a measure of the currency against a basket of six major rivals, was off 0.2%.
- Oil futures settled higher after the U.S. benchmark on Friday snapped a string of seven straight weekly gains. West Texas Intermediate crude CL.1, +0.93% rose 1% to settle at $109.41 a barrel.
- Gold futures GC00, -0.61% finished 0.1% lower to settle at $1,838.80 an ounce, dropping for a second session.
- The Stoxx Europe 600 SXXP, +0.35% and London’s FTSE 100 UKX, +0.42% each rose 0.4%.
- The Shanghai Composite SHCOMP, -0.24% fell 0.3%, while the Hang Seng Index HSI, -1.17% rose 1.9% in Hong Kong and Japan’s Nikkei 225 NIK, -0.00% gained 1.8%.