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US stocks are recovering and calm is returning to Wall Street after Japan’s stock market surged earlier on Tuesday, recouping much of the losses suffered during its worst day since 1987.
The S&P 500 rose 1.6 percent in afternoon trading, on track to snap a brutal three-day losing streak. The index had fallen just over 6 percent after several weaker-than-expected reports raised concerns that the U.S. Federal Reserve had been slamming on the brakes for too long on the U.S. economy by using high interest rates to beat inflation.
The Dow Jones Industrial Average was up 480 points, or 1.2 percent, at 11 a.m. Eastern Time, and the Nasdaq Composite was up 1.7 percent.
The vast majority of stocks rose in a mirror image of the day before, from smaller companies that rely on U.S. household spending to large multinationals that are more dependent on the global economy.
Meanwhile, the TSX fell 1.65 percent on Tuesday afternoon as markets reopened. Canada’s main stock index was closed Monday for the bank holiday and closed down 2.1 percent on Friday, its biggest daily decline since mid-February.
“Canadian stocks did not fall yesterday as the market was closed [and] now they are catching up. There will be a big gap this morning to compensate for that,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.
According to Martin Pelletier, senior portfolio manager at Wellington-Altus Private Counsel, the TSX has “more traditional” segments of the economy than the major U.S. indexes.
CBC’s Scott Peterson looks at the volatility that roiled US markets on Monday, and how markets are responding.
During big market events like the ones of the past few days, “you get a little bit more of a softer type of reaction,” he said. “We didn’t benefit from the rally to the same extent, but we didn’t participate in the down move.
“That said, there is a correlation between all global markets, and so a correction in the US will also impact the Canadian market.”
‘Perfect storm’ behind heavy market losses
Stronger-than-expected earnings reports from several major U.S. companies helped support the market. Kenvue, the company behind Tylenol and Band-Aids, rose 12.7 percent after reporting stronger-than-expected earnings, helped by higher prices for its products. Uber rose 7.9 percent after easily beating earnings estimates for its latest quarter.
Caterpillar jumped from an early loss to a gain of 3.8 percent after the company reported higher-than-expected profit but lower revenue.
There are several technical factors that have accelerated the recent market slump, in addition to weak U.S. employment data and other reports. Barclays strategists are calling it a “perfect storm” that is causing extreme market moves.
One is Tokyo, where a favorite trade for hedge funds and other investors began to fail last week after the Bank of Japan made borrowing more expensive by raising interest rates to near zero.
That disrupted trades in which investors borrowed Japanese yen at low cost and invested it elsewhere in the world. The resulting exits from those trades may have helped accelerate the declines for markets around the world.
Japan’s Nikkei 225 rose 10.2 percent on Tuesday, recouping much of the previous day’s 12.4 percent drop, the worst since the Black Monday crash of 1987. Tokyo stocks recovered as the Japanese yen stabilized somewhat against the U.S. dollar after several days of sharp gains.
“The speed, magnitude and shock factor clearly show” that the price moves are largely due to trader positioning, and not just concerns about the economy, Barclays strategists Stefano Pascale and Anshul Gupta said.
Still, there are voices on Wall Street urging caution.
Barry Bannister, chief equity strategist at Stifel, warns that further declines could be ahead due to the slowing U.S. economy and persistent inflation.
He predicts that both factors will play out worse in the second half of this year than much of Wall Street expects. At the same time, he says the price of the U.S. stock market is still “frothy” compared to bond yields and other financial conditions.
The stock market decline is “not a temporary blip,” he warned in a report, calling it “too early to bounce back.”
Bannister has been predicting a coming “correction” in U.S. stocks for some time, including an admission in July that his first call had been early. That was just days before the S&P 500 hit its latest all-time high and then began to decline.
While fears of a slowing U.S. economy are growing, they are still growing and a recession is far from certain. The U.S. stock market is also still up sharply for the year so far. The S&P 500 has soared to dozens of record highs this year, partly on the frenzy surrounding artificial intelligence technology, and critics have said the prices looked too expensive.
Elsewhere, European markets were barely affected by the recovery, with stock indices falling slightly in Germany, France and the UK.
