The Dow Jones Industrial Average had its biggest one-day advance in more than three months on Monday, as investors factored in the possibility that the Federal Reserve might be forced to back away from aggressively tighter monetary policy.
What happened
- The Dow Jones Industrial Average DJIA, +2.66% finished up by 765.38 points, or 2.7%, at 29,490.89, after rising 922.28 points at its session high. That’s the biggest percentage gain since June 24, according to Dow Jones Market Data.
- The S&P 500 SPX, +2.59% ended up by 92.81 points, or 2.6%, at 3,678.43.
- The Nasdaq Composite COMP, +5.17% advanced 239.82 points, or 2.3%, to 10,815.43.
As of last week, the S&P 500 had fallen for three consecutive quarters, down by 24.8% over that time, and lost 9.3% in September, the biggest monthly decline since March 2020. On Friday, the Dow and S&P 500 posted their lowest finishes since November 2020, while the Nasdaq saw its lowest close since July 2020.
What drove markets
Concerns over financial stability reverberated as a new week, trading month and quarter got under way on Monday. The worry centered on Swiss banking giant Credit Suisse CSGN, -0.93% CS, +2.30% which saw its shares touch a record low on Monday before recovering, as the cost of insuring the bank’s debt against default continued to rise. The bank’s troubles have investors weighing the risks of a 2008-type Lehman Brothers collapse that might trigger a broader financial crisis.
U.S. stocks seemed to benefit from the bad-news-is-good-news dynamic that has occasionally buoyed equities. Growing warnings about a potential U.S. recession were accompanied by renewed chatter about the possibility of a Fed pivot, suggesting a risk that investors are “again underestimating the Fed’s resolve as it seeks to tackle inflation,” said Deutsche Bank research analyst Henry Allen.
“It is fair to say that the market is now wondering aloud if all this talk about getting inflation under wraps is something they, at the Fed, could adhere to in the context of a lot of stresses coming into the market,” said Tom Porcelli, the New York-based chief U.S. economist for RBC Capital Markets. “It’s a completely fair thing for the market to wonder about. I don’t want to make a lot out of one day’s moves, but the commentary from people we are talking to is also a reflection of that.”
“There’s no question the Fed wants to get inflation under control,” Porcelli said via phone on Monday. “The bigger question is, ‘Are they under autopilot until inflation moves back to a level they are comfortable with or do other factors come into play that could derail their plans?’”
Early gains in major stock indexes were extended after the Institute for Supply Management said its closely watched manufacturing index fell to a 28-month low of 50.9% in September, or the lowest level in more than two years, as high inflation and rapidly rising U.S. interest rates began to rattle the economy. Economists polled by The Wall Street Journal had forecast the index to drop to 52% from 52.8% in August.
Meanwhile, fed-funds futures traders backed away from their expectations for Fed policy makers to lift the main policy rate target to between 4.75% and 5% in 2023, according to the CME FedWatch Tool. Fed officials have delivered five rate hikes this year, three of which were 75-basis-point moves. Traders now mostly see the fed-funds rate target getting to between 4.25% and 4.5% by December, up from a current level between 3% and 3.25%.
“The market is clearly positioning for a Fed pause after the December FOMC meeting,” said Ed Moya, a senior market analyst for the Americas at OANDA Corp., referring to the rate-setting Federal Open Market Committee. “Whether it’s weaker manufacturing data, more financial risks to the system that are growing, or fears that the housing market is cooling too fast, there’s so much risk on the table that it may be difficult for the Fed to remain this aggressive.”
Traders and analysts said stocks were technically overdue for a short-term bounce anyway after a brutal selloff, but they still expressed caution.
Market internals are “shot to pieces,” with 1.7% of S&P 500 companies trading above their 20-day moving average, 32% of companies sporting a relative strength index below 30, signaling oversold conditions, and 35% of companies at new 4-week lows, said Chris Weston, director of research at Pepperstone, in a note.
“This ultra-bearish sentiment plays into the risk vs. reward trade-off, and it suggests if we hear something remotely positive, and we see better flow, the result will be a pronounced equity counter-rally, which may motivate funds to reduce U.S. dollar long positions as the default equity hedge,” he wrote.
But investors could also be in for another brutal week, Weston said, noting that “liquidity remains a core consideration that exacerbates moves as funds try and get out of positions.”
There was some calming news from the U.K., where a government U-turn on tax policy that had roiled equity and fixed-income markets last week helped push sovereign bond yields lower on Monday.
The benchmark 10-year Treasury TMUBMUSD10Y, 3.640% declined 15.2 basis points to 3.65% as the equivalent duration U.K. bond TMBMKGB-10Y, 3.959% eased 19 basis points to 3.96%.
Companies in focus
- Shares of Tesla Inc. TSLA, -8.61% finished down by 8.6% after the electric-vehicle maker reported record quarterly deliveries on Sunday. The number still disappointed analysts.
- Oil-and-gas companies like Chevron Corp. CVX, +5.61%, Exxon Mobil Corp. XOM, +5.28%, Marathon Energy Corp. MPC, +3.48% and Devon Energy Corp. DVN, +8.65% surged on the back of higher oil prices following reports the Organization of the Petroleum Exporting Countries and their allies, or OPEC+, would consider a large production cut at a meeting this week. West Texas Intermediate crude futures for November CLX22, 0.33% delivery rose $4.14, or 5.2%, to settle at $83.63 barrel on the New York Mercantile Exchange. Shares of Chevron finished up by 5.6%. Exxon ended up by 5.3%, while Marathon and Devon each closed higher by 3.5% and 8.7%, respectively.