Stock prices rise as buyers snap up bargains after bust: Markets Wrap

(Bloomberg) — A fresh wave of dip-buying has helped stocks rebound from a sell-off sparked by economic concerns. Traders are now looking to this week's inflation data for clues about the extent of the Federal Reserve's interest rate cuts.

Almost all major companies in the S&P 500 rose, with the benchmark up 1.2 percent. This came after the worst start to September ever, according to data from Bespoke Investment Group dating back to 1953. Nvidia Corp. and Tesla Inc. led the gains among megacaps. Apple Inc. unveiled the iPhone 16, whose CEO Tim Cook said was designed “from the ground up” for artificial intelligence. Shares closed little changed after a nearly 2 percent slump.

“We're seeing mostly technical buying on dips,” said Tom Essaye of The Sevens Report. “Economic growth is undoubtedly losing momentum, but a soft landing remains more likely than a hard landing. This week, the focus returns to inflation.”

Treasury bonds saw slight price movements. Traders reduced the probability of a half-percentage point rate cut at the upcoming Fed meeting in September from 50 percent last week to around 20 percent. At the same time, some options traders bet on an extension of the expected Fed easing measures until December or March.

The S&P 500 closed at 5,471. The Nasdaq 100 gained 1.3 percent. The Dow Jones Industrial Average gained 1.2 percent. The Russell 2000 rose 0.3 percent. Boeing Co. gained 3.4 percent on optimism that a labor agreement will prevent a strike. Alphabet Inc. fell 1.7 percent as Google returned to court to face U.S. Justice Department allegations that it manipulated the display advertising market.

Yields on 10-year US Treasury bonds remained almost unchanged at 3.70%. The dollar gained. Bitcoin rose to around USD 57,000.

“Stock investors are balancing between excitement over a Fed rate cut, fears of recession and a political wonderland,” said Craig Johnson of Piper Sandler. “Looking at the mainstream averages through the lens of technical analysis suggests that last week's weakness was just a dip in a longer-term uptrend.”

According to strategists at RBC Capital Markets, US equity markets could remain choppy and see further declines in the near term due to risks related to seasonality, sentiment and the presidential election.

“Any further damage would be within a range of 10 percent,” wrote Lori Calvasina's team in a statement. They warn that as fears of a hard landing increase, the risk of a growth decline in the range of 14 to 20 percent “will admittedly also increase.”

With labor market data signaling a slowdown rather than an imminent recession, HSBC strategists led by Max Kettner said they would increase their overweight position in U.S. equities due to the stable earnings outlook for the third quarter.

Higher volatility over the short, medium and long term will make utilities and other quality and income stocks more attractive compared to growth stocks, Savita Subramanian, equity and quantity strategist at Bank of America Corp. said Monday.

“Favour the tortoise (quality and income) over the hare (growth and re-rating),” she wrote in a note to clients, adding that utilities' returns have matched those of the Nasdaq “over the long term.” Subramanian said utilities are also beating technology stocks this year.

According to strategists at Citigroup Inc., major indices are vulnerable to further declines due to last week's sell-off in U.S. stocks.

Large unwinds of long S&P 500 positions and short positions suggest risk appetite is moving toward a “directly bearish bias,” said Chris Montagu's team. The de-grossing method, or the closing of long and short positions by hedge funds, leaves gross exposure at half its mid-July peak, the strategists found.

Hedge funds continued to reduce their positions in U.S. stocks as the S&P 500 suffered its biggest weekly decline since March 2023.

Net selling in global equities, led by North America, occurred for the eighth straight week, according to Goldman Sachs Group Inc.'s prime brokerage desk report for the week ended Sept. 6. The move is a continuation of a trend that broadly began in May, when funds began unwinding large holdings to have more cash on hand for potential dislocations related to the U.S. presidential election.

“Economic downturns do not necessarily mean recessions, and stock market corrections are not necessarily harbingers of bear markets,” said Konstantinos Venetis of TS Lombard. “But the mix of increasing macroeconomic (growth) and political (US elections) uncertainty is increasingly putting the burden of proof on the bulls in the short term.”

According to Venetis, while the Fed is prepared to ease its interest rates, the question is whether these “insurance cuts” could prove to be too little, too late.

“The risk is that the 'growth fear' dynamic takes on a life of its own and further increases pressure on an equity market that already appears vulnerable from a technical perspective,” he noted.

For Mark Haefele of UBS Global Wealth Management, the fundamentals for equities remain positive despite periods of equity weakness.

“We expect S&P 500 earnings to rise 11% this year and 8% in 2025,” he said. “And historically, in the 12 months following the Fed's first rate cut in a cycle, unless there was a recession in the U.S., the index has gained an average of 17%.”

History shows that the Fed's success in implementing a soft or hard landing will play a key role in determining the direction for U.S. equities, says Seema Shah of Principal Asset Management.

For example, in 1985 and 1995, interest rate cuts led to strong stock price gains because recessions were avoided, she says. But in 2001 and 2007, even drastic easing measures during economic recessions could not prevent steep market declines.

“Today, markets remain cautiously optimistic, reflecting hope that rate cuts will prevent a downturn,” Shah said. “However, if economic conditions deteriorate significantly, recession fears could outweigh the benefits of rate cuts. History shows that rate cuts themselves are not the enemy – it is the economic context in which they occur that investors should keep a close eye on.”

On Wednesday, a government report is expected to show that the consumer price index rose 2.6 percent in August from a year earlier, according to the median forecast of economists surveyed by Bloomberg. That would be the smallest increase since 2021. There will be little new guidance from Fed officials, who are in the traditional blackout period ahead of the Sept. 17-18 meeting.

“Inflation is important,” said Chris Low of FHN Financial. “Weaker numbers could encourage the Fed to cut 50 basis points, while anything above that could mean 25 basis points. But even if inflation is moderate and some participants are pushing for a deeper cut, we expect the Fed to settle on a quarter point as a first step, with the option to cut faster at subsequent meetings if the data supports a faster move.”

Some of the key market movements:

This story was created with the assistance of Bloomberg Automation.

– With support from Vildana Hajric.

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