U.S. stocks rebounded on Tuesday as investors bought the dip a bit following the S&P 500’s worst day since May.
Gains were kept in check as investors awaited the end of the Federal Reserve’s two-day meeting, which kicked off Tuesday.
The Dow Jones Industrial average rose 142 points, or 0.4%. The S&P 500 gained 0.4% and the Nasdaq Composite added 0.5%.
Asian markets were stable overnight, helping sentiment in the U.S. after fears grew Monday that the liquidity crisis at Chinese developer Evergrande would lead to a global contagion. Hong Kong’s Hang Seng Index rose 0.5% after dropping more than 3% on Monday.
“There has already been a sharp bounce off Monday’s intraday low and the catalysts for the correction have yet to be resolved, so we would expect a bit more indigestion and begin adding risk back into the market on any further weakness as the bottoming process begins,” Canaccord Genuity analyst Tony Dwyer said in a note Tuesday.
On Monday, the S&P 500 slid 1.7% for its worst day since May 12. The Dow Jones Industrial Average plummeted 614 points, or 1.8%, for its biggest one-day drop since July 19. The Nasdaq Composite shed 2.2%.
Stocks linked to global growth that led Monday’s sell-off were bouncing in premarket trading Tuesday. Nucor steel was up 1.8% in premarket trading. Copper miner Freeport-McMoRan added 3%. Chipmakers, banks and energy stocks were also bouncing.
Uber shares jumped 5% after raising its outlook for the third quarter.
Investors are looking for more information from Fed Chairman Jerome Powell Tuesday about the central bank’s plans to taper its bond buying, specifically when that will happen. Powell said last month that he sees the Fed slowing its $120 billion in monthly purchases at some point this year.
The Fed will release its quarterly economic forecasts, the so-called dot plot, along with the statement on interest rates at 2 p.m. ET Wednesday. Powell will have a press conference after the announcements.
“We’re going to have to see proof that the Fed dot plots don’t come out in a way that spooks the market,” said said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.
Struggling real estate developer China Evergrande Group teeters on the brink of default and is due to pay interest worth $83 million this Thursday, according to S&P Global Ratings. Analysts largely believe Evergrande will miss the interest payment and S&P sees a default as “likely,” which many worry could spread financial contagion the way Lehman Brothers did 13 years ago.
“We’re going to have to see some proof that the Chinese government is taking steps to manage this,” Ma added.
Also weighing on markets is the delta variant, which remains a global health threat as the colder months approach and vaccination hesitancy persists among some Americans. Johnson & Johnson said on Tuesday that its Covid vaccine booster shot is 94% effective.
Stocks linked to global growth led losses on Monday and energy names took a hit thanks to a 2% drop in U.S. oil prices. Banks stocks dropped as bond yields fell.
The Cboe Volatility index, Wall Street’s fear gauge, jumped above the 26 level on Monday, the highest since May.
Investors are also concerned about the deadline to raise the debt ceiling and possible tax increases. Congress returned to Washington from recess rushing to pass funding bills to avoid a government shutdown.
September is a historically volatile month for stocks and after the S&P 500’s 16% rally year-to-date, many investors have said the market is due for a pullback. Some strategists called Monday’s sell-off a buying opportunity.
“The market sell-off that escalated overnight we believe is primarily driven by technical selling flows ([commodity trading advisors] and option hedgers) in an environment of poor liquidity, and overreaction of discretionary traders to perceived risks,” Marko Kolanovic, JPMorgan chief global market strategist, said in a note Monday.
Others said volatility is likely to persist until some of the risks are resolved.
“We’re not in the camp that this small pullback represents a special buying opportunity,” said Ma. “There could easily be more volatility depending on what happens with the Fed meeting…similar with the debt ceiling. With the overhang and then negotiations, this is definitely going to be pushed to the wire.”
— with reporting from CNBC’s Hannah Miao.