The Dow Gains 260 Points Because the Only Constant Is Change
Late-Day Sprint. After staying below the break-even line for most of the day, the stock market staged a late-afternoon rally and managed to fight its way back to positive territory. All three major indexes closed in the green on Thursday, maintaining the streak from Wednesday’s 5% rally. The Dow Jones Industrial Average had added a record-breaking 1,086 points on Wednesday, but the question remains whether the upward momentum can continue. In today’s After the Bell, we…
…examine how volatile the market has become;
…explain why Wednesday’s rally might be unsustainable;
…and wonder what factors-if any-might keep it going.
5% rallies can’t be an every-day thing
After getting hammered for most of the day, markets staged a sharp rally and turned positive with less than half-an-hour left in the day. The Dow Jones Industrial Average increased 260.37 points, or 1.1%, to 23138.82, while the S&P 500 surged 21.13 points, or 0.9%, to 2488.83, and the Nasdaq Composite added 25.14 points, or 0.4%, to 6579.49.
Thursday’s intraday reversal isn’t uncommon as of late. Over the past two months, the S&P 500’s average daily range has now ticked up to 1.19%, according to Paul Hickey from Bespoke Investment Group. “While we are nowhere near the record levels of over 4% from the peak of the Financial Crisis, the current level is the highest since early 2012,” Hickey wrote in a Thursday note.
Wednesday’s 5% rip in major indexes is likely unsustainable, Hickey said. Since 1928, the S&P 500 has recorded 136 gains of over 4%, but only 18 sessions saw the close before the rally as the low water mark for the selloff. For 106 times, the large one-day gain was followed by more selling over the next three months.
Hickey noted there have only been four times when the market has rallied more than 4% while the Fed is tightening, with the bottom reached only one out of those four times: “In either case, though, it seems obvious to say that based on historical data the odds of a new low in the S&P 500 (that is, a low below the Christmas Eve close) is much more likely than the odds that yesterday’s furious surge marked the end of the selloff in stocks.”
Dennis DeBusschere from Evercore ISI is a little more optimistic. “Yesterday’s rally does not mean the declines are over, that will be determined largely by political events over the coming months,” he wrote Thursday. “But it does suggest there is money waiting to be deployed back into equities if the darkening outlook for economic and earnings growth improves.”
If the political and Fed risks ease, fear should remain controlled and allow for a recovery in stock valuations going forward. DeBusschere expects the S&P 500 to trade at roughly 15 times forward earnings versus the 13.6 level as of this Monday.
With no near-term recession in the sight, Scott Minerd from Guggenheim Investments believes what we have seen over the past few weeks is more like a late expansion correction-similar to the Asian Crisis in 1998-rather than a bear market, and that the Fed will eventually come to save the market. “The Fed will be quick to rescue markets if stocks continue to fall from their highs,” Minerd wrote in a note Thursday. “Policymakers haven’t the stomach to watch this dislocation turn into a systemic crisis.”
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