Stocks and index ETFs continued to rebound off of bear market lows on Tuesday after a sharp sell-off in June as investors weighed the likelihood of a recession and the effect of additional rate hikes from the Federal Reserve.
The Dow Jones Industrial Average rallied 1.9%, while the S&P 500 jumped 2.6% and the Nasdaq Composite scrambled 3.1% higher following the Juneteenth holiday.
Major stock ETFs also showed signs of life on Monday. The SPDR Dow Jones Industrial Average ETF (DIA), the SPDR S&P 500 ETF Trust (SPY), and the Invesco QQQ Trust (QQQ) all showed significant gains just before 12:00 PM Eastern.
Last week, the S&P 500 recorded its worst week since 2020. While a multitude of investors and traders are now anticipating a recession, making any potential rebound ephemeral, there are some investors who are likely buying into the market believing it to be oversold.
Some analysts are also looking for more confirmation before declaring this to be a broad-based bottom.
“The outstanding question is whether this is simply a bounce or the bottom,” said Sam Stovall, chief investment strategist at CFRA Research. “I think that this could certainly be a bounce but not the bottom because the one missing ingredient is a fear-based capitulation sell-off.”
Inflation continues to be a major factor for equities as well, as analysts see it affecting earnings numbers.
“Even in the event of recession is avoided, the earnings numbers are too high because the inflationary pressure on costs is now squeezing margins, meaning our fire and ice narrative really is playing out to a tee, and we’ve priced a lot of it,” Mike Wilson, chief U.S. equity strategist at Morgan Stanley, said on CNBC’s “Squawk Box” on Tuesday. “We just haven’t priced it fully for the recessionary outcome.”
“I think we’re in one of those very difficult periods where simple capital preservation is I think the most important thing we can strive for,” wunderkind Paul Tudor Jones said. “I don’t know if it’s going to be one of those periods where you’re actually trying to make money.”
Savvy investors who see the market moving lower could also consider inverse ETFs as trade vehicles.
For example, the Direxion Daily S&P 500 Bear 3X Shares (SPXS) offers 3x daily short leverage to the broad-based S&P 500 Index, making it a powerful tool for investors with a bearish short-term outlook for U.S. large-cap stocks. Investors should note that the leverage on SPXS resets on a daily basis, which results in compounding of returns when held for multiple periods. BGZ can be a powerful tool for sophisticated investors, but it should be avoided by those with a low risk tolerance or a buy-and-hold strategy.