Wall Street’s big rebound might not be all-clear signal
After weeks of carnage that marked the worst fourth-quarter start for stocks in 10 years, the market rebounded Monday, raising a key question: Is the rally just a short-term bounce or does it signal the end of a sharp drop on Wall Street?
The long-awaited rally materialized after sellers sliced nearly 2,000 points off the Dow Jones industrial average over the prior 10 days. But professional investors – still skittish after the recent rout pushed the broad market down more than 10 percent and into official “correction” territory – aren’t ready to declare the all clear just yet.
The mood among investors remains cautious despite a more than 350point, 1.5 percent advance Monday for the blue-chip Dow average. Stocks got
a lift from a strong start to the holiday shopping season: Online Cyber Monday sales were seen jumping more than 18 percent compared with last year to $7.8 billion, building on strong results on Thanksgiving and Black Friday, according to Adobe Analytics. Amazon shares rose more than 5 percent, and the SPDR S&P Retail ETF climbed nearly 2 percent.
❚ Skepticism: Still, lingering investor skepticism shouldn’t be surprising, given that eight of the Dow’s 15 biggest daily point gains in history have come in bear markets, or stretches in which the broad market was down more than 20 percent from its highs.
“Bounce or bottom?” was how Sam Stovall, chief investment strategist at New York-based Wall Street research firm CFRA, summed up investors’ question about the future direction of stock prices.
At the moment, the answer is unclear. Still, the question is fueling a lively debate. Market skeptics, citing severe damage to popular and once-high flying tech stocks, the fallout from the trade fight between the U.S. and China and the drag on growth and corporate profits due to the Federal Reserve’s interest rate hikes, warn the rebound might not last.
“The bar remains high for a durable move,” said Chris Verrone, a partner and head of the technical analysis team at Strategas Research Partners.
Last week, roughly 45 percent of the companies in the Standard & Poor’s 500 stock index were in a bear market, according to Bloomberg data. And after drops of that magnitude, rebound rallies are often met with selling by investors looking to limit their losses, get back to even or lock in any profits they may still have.
This type of selling pressure acts like a ceiling on prices.
❚ Reasons for hope: The market has been beaten up so badly that valuations have fallen to a low enough level to potentially lure back buyers, an analysis by CFRA’s Stovall found. The S&P’s price-to-earnings ratio, or PE, for the coming 12 months has fallen from 19.3 in late January to 15.6 now. The current PE is close to the 15.3 multiple that marked the bottom of the past five stock pullbacks in the current bull market.
In another potential positive, shares of automakers and homebuilders, which had been severely punished by investors, have done better than other parts of the stock market in recent days, according to Verrone.
“It’s likely an early sign,” he says, “that some downtrends are exhausted among the stocks that got hit first” in the current correction.
Most bear markets coincide with a recession, as well. But money management firm Glenmede places just a 35 percent chance of a recession in the next year.