After several brutal sessions of selling, stocks showed signs of stabilization on Wednesday even as oil prices hit fresh highs and Treasury yields continued their ascent. Major indexes closed mixed after a choppy day of trading, with the Dow shedding 0.2% while the S&P 500 finished just above flat and the Nasdaq gained 0.2%.
The modest rebound comes on the heels of a massive rout Tuesday that saw the Dow plunge over 800 points, its worst single-day loss since mid-March. Investors have been rattled by signals from the Federal Reserve that interest rates still have further to climb in order to tame inflation. This dashed hopes that the central bank might start easing policy soon.
Surging oil prices have only exacerbated worries about prolonged inflation. West Texas Intermediate crude topped $94 a barrel Wednesday, its highest level so far this year. Brent crude also hit a 2023 peak near $97 as tight supplies, robust demand, and OPEC’s planned production cuts supported prices. Energy markets have seen massive volatility in recent months amid Russia’s war on Ukraine.
At the same time, Treasury yields continue marching higher as the Fed maintains its hawkish stance. The 10-year yield surpassed 4.6% Wednesday, its highest point since 2007. Rising yields make borrowing more expensive and can draw investments out of stocks, especially pricey technology shares.
The confluence of higher rates, expensive oil, and recession fears has battered investor sentiment after what began as a promising year. Following Wednesday’s mixed session, the S&P 500 remains down over 22% in 2022 while the tech-centric Nasdaq has plunged nearly 32%.
Some market veterans, however, believe the worst of the sell-off may be over. Tuesday’s dramatic plunge led to oversold conditions that were ripe for at least a short-term bounce. Bargain-hunting investors stepped in Wednesday, judging recent losses as excessive given a still-resilient US economy.
“While risks remain skewed to the downside, panic sentiment appears to have peaked for now,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
Others caution significant risks remain, including ongoing Fed tightening, the war in Ukraine, and signs of weakness in housing and manufacturing. Much will depend on upcoming corporate earnings reports and guidance. Next week brings results from heavyweights Apple, Microsoft, Alphabet, Amazon and Meta.
Beyond market turbulence, another source of uncertainty is the potential for a federal government shutdown starting this weekend. The Senate has forwarded a bill to extend funding to mid-November, but it remains unclear if the House will act in time. Shutdowns typically have minor economic impact, but would deal another blow to already shaky sentiment.
For now, bulls are relieved to see a pause in the bloodletting after a historically grim September and early October. But with so many variables in play, volatility is likely to remain high in coming weeks. Traders expect continued turbulence as the market seeks a bottom in the face of stiff macroeconomic headwinds.
Upside appears limited given the Fed’s unambiguously hawkish posture. However, evidence of moderating inflation could change the equation. Markets eagerly await each new data point for signs of peaking price pressures. Wage growth and consumer spending trends will be closely watched.
In the meantime, analysts recommend defensive positioning despite the temptation to buy dips. Dividend stocks, healthcare, utilities and consumer staples represent prudent bets compared to more speculative areas. Risk management and patience will be key in navigating the challenging investment landscape.
For investors with longer time horizons, equities still offer attractive return potential once the cycle turns. But in the near term, caution remains warranted. It will likely take sustained positive catalysts, rather than a single oversold bounce, to decisively shift sentiment back to bullish. Until clear signs of a pivot emerge, expect more downside volatility.