U.S. stocks climbed Tuesday afternoon, recovering much of the ground lost in the previous session when rising worries over the spread of the delta variant of the coronavirus that causes COVID-19 triggered a selloff that left major benchmarks at nearly one-month lows.
What are stock-market indexes doing?
The Dow Jones Industrial Average
jumped 556.56 points, or 1.6%, to 34,518.60.
The S&P 500
was up 65.12 points, or 1.5%, at 4,323.64.
The Nasdaq Composite
advanced 222.62 points to 14,497.60, a gain of 1.6%.
On Monday, the Dow tumbled 725.81 points, or 2.1%, to end at 33,962.04, suffering its biggest one-day loss since October. The S&P 500 dropped 1.6% and the Nasdaq Composite shed 1.1%, for their biggest declines since May.
What’s driving the market?
The bounce reflects ideas that Monday’s selloff was overdone, analysts said, though concerns over high valuations in the stock market persist.
“Markets have a way, particularly in the middle of the summer, to price in the worst-case scenario pretty quickly,” said Art Hogan, chief market strategist at B. Riley National, in a phone interview.
Stocks sank Monday in a move largely attributed to fears the spread of the delta variant in Asia in particular would slow down the global economic recovery and possibly lead to renewed restrictions on travel and activity as inflation continues to rise. The World Health Organization says cases and deaths are climbing globally after a period of decline, spurred by the highly contagious delta variant.
“Now we have to consider if the economic backdrop has changed,” said Steve Sosnick, chief strategist at Interactive Brokers, in an interview Tuesday. “The bond market is definitely not as gung ho on this,” he said, as it’s “expressing some fears that growth may not be as robust as we had expected.”
Sosnick pointed to the recent drop in 10-year Treasury yields, which saw a big move lower Monday, saying that “really ought to give people some pause.” Investors have “baked a lot of growth” into the stock market, which has run up to records this year and hasn’t seen a 5% pull back in months, he said.
Although Sosnick doesn’t expect a repeat of broad economic lockdowns, he said he worries that “rolling Covid outbreaks” could lead to more “supply chain hiccups.”
The U.K this week reopened its economy in a move called “Freedom Day,” which kicked off with British Prime Minister Boris Johnson in quarantine after coming into contact with a government official who tested positive for Covid-19. The reopening comes as the Centers for Disease Control and Prevention in the U.S. is advising to avoid traveling to the U.K. due to Covid concerns, Sosnick said.
“There’s a lot of mixed messaging,” he said, at a time “I think U.S. investors have priced in a robust return to normal.”
The delta variant has led a surge in new coronavirus cases, particularly among the unvaccinated, but Monday’s selloff in the face of what is likely to be no more than a mild economic slowdown “was likely overplayed,” Hogan said.
That doesn’t mean stock-market bulls are out of the woods, he said. Equities have gone months without a pullback of at least 5%, valuations are stretched, leaving the market “priced for perfection” amid weak seasonals. Added together, it wouldn’t be a shock for stocks to suffer a 5% to 10% pullback, he said.
Other analysts see more foreboding developments.
“The word ‘stagflation,’ which was a theme in the late 1970s, is being bantered about again: a stagnant economy and inflation, an intractable combination of problems,” said Marshall Gittler, head of investment research at BDSwiss Holding Ltd., in a note.
Worries about the economic growth outlook and inflation could limit potential for equities to bounce in the near term, while making life more difficult for economic policy makers with inflation rising in the U.S., analysts said.
“On the one hand, it will be difficult to keep planning hikes in case the economy is hurt again, while on the other one, you cannot ignore inflation if it continues to skyrocket well above your objective,” said Charalambos Pissouros, head of research at JFD Group, in a note. “ For now, a cocktail of virus concerns and expectations of rate hikes in early 2023 may keep investors morale dented.”
Stock-market investors continue to track the Treasury market, where a rally in long-dated maturities has sent yields sharply lower, amplifying worries about the economic outlook. The yield on the 10-year note
was up about 1.4 basis points at 1.208% Tuesday afternoon, after falling Monday to its lowest since mid-February.
In economic data, U.S. home builders started construction on homes at a seasonally-adjusted annual rate of 1.64 million in June, representing a 6.3% increase from the previous month’s downwardly-revised figure, the U.S. Census Bureau said. The pace of permitting for new housing units dipped again in June, however. Permitting for new homes occurred at a seasonally-adjusted annual rate of nearly 1.6 million, down 5% from May but 23% up from a year ago.
Meanwhile, the corporate earnings reporting season is forecast to see S&P 500 index company profit growth of nearly 70% for the second quarter from a year earlier as the economy recovers from the pandemic, but investors fear slowing earnings growth in the second half of the year.
On the international stage, tensions between U.S. and China are raising concerns about global trade. On Monday, the Biden administration accused the Chinese government of hacking Microsoft.
Which companies are in focus?
AMC Entertainment Holdings Inc.
the world’s largest movie-theater chain, is reopening two of the top-grossing theaters in the Los Angeles area, which have been closed for more than a year. Shares of the popular meme stock were up 11.4%.
Shares of Travelers Companies Inc.
rose 1.3% after it swung to a second-quarter profit that was well above expectations, fueled by strong growth in investment income and a drop in catastrophe losses.
What are other markets doing?
The ICE U.S. Dollar Index
a measure of the currency against a basket of six major rivals, rose 0.1%.