Stocks Climb After Fed-Fueled Washout; Bonds Sink: Markets Wrap

Stocks climbed, following three straight weeks of losses in Wall Street that pushed the market closer to oversold levels.

The rebound in equities drove the S&P 500 up for the second time in seven days. Treasuries slumped across the curve, taking the 10-year yield above 3.25%. The dollar advanced.

American shares have wiped out about half of a rally from their June lows after the Federal Reserve signaled it will stay hawkish as it confronts the hottest inflation in four decades. While the market should still remain in “choppy waters” amid economic uncertainties, several indicators suggest the selling is getting overdone, according to Keith Lerner at Truist Advisory Services.

“Markets do not typically move in a straight line,” said Lerner. “Of course, oversold markets can get more oversold. Still, after advocating for trimming equities on strength, we would be less apt to do so now — at least over the short term.”

To Matt Maley at Miller Tabak + Co., any gains at this point should be seen as a short-term relief rally after a rough couple of weeks. He says traders should use those bounces as an opportunity to get more defensive.

“We should get an incredibly great opportunity to ‘buy on weakness’ in the coming months,” he added. “We just don’t think this past June was that great opportunity.”

Meantime, one of Wall Street’s biggest bears is turning even more pessimistic on the outlook for profits.

Morgan Stanley strategist Mike Wilson cut his expectations for earnings-per-share growth, saying that a slowing economy is now likely to be a bigger concern for stocks. In 2023, he expects profits to fall 3% even in the absence of a recession.

Investors are unwinding their equity positions as if a deep recession is already here. So say strategists at Deutsche Bank AG, who found that a historically strong link between discretionary investors’ equity exposure and the ISM manufacturing index is unwinding.

Their current stock exposure stands at the bottom-10th percentile of historical observations after a sharp drop last week. Historically, that’s been consistent with an ISM print of 47, below the level of 50 that signals recession.

Global equity funds had outflows of $9.4 billion in the week to Aug. 31, the fourth-largest redemptions this year, according to EPFR Global data cited by Bank of America Corp. US equities had the biggest exodus in 10 weeks, while $4.2 billion left global bond funds.

In corporate news, Bed Bath & Beyond Inc. declined after Chief Financial Officer Gustavo Arnal fell to his death Friday from a Manhattan skyscraper. CVS Health Corp. reached a deal to buy home-health and technology services provider Signify Health Inc. for about $8 billion.

https://www.bloomberg.com/news/articles/2022-09-05/stocks-set-for-steady-asia-open-crude-oil-jumps-markets-wrap