(Aug 7): Buyers waded into the stock market on Tuesday following a three-day rout fuelled by fears of a US economic slowdown and extreme tech-sector valuations. 

The S&P 500 Index and technology-heavy Nasdaq 100 Index each gained 1%. Traders appeared to be less on edge about the prospect of further turbulence, as the VIX Index tumbled after reaching the highest since 2020 on Monday.

The moves come after the S&P 500 shed 6% across the past three sessions. The turmoil was sparked by data showing a rise in US unemployment, causing investors to worry the Federal Reserve isn’t moving quickly enough to cut interest rates to stave off an economic slowdown.

“It seems like a typical reflexive bounce after such a sharp decline,” said Kevin Gordon, senior investment strategist at Charles Schwab & Co. The rebound in cyclicals like financials and industrials indicated investors aren’t buying into the idea that recent declines were spurred by recession fears, he said. 

“That isn’t to say we’re out of the woods with the recent correction,” he said. Any weakness in labour-market data later this week “has the power to upend things again, but folks definitely threw the baby out with the bath water yesterday morning,” he said.

Hedge funds stepped in to buy the big dip in technology shares after the recent rout, according to Goldman Sachs Group Inc.’s prime brokerage data. JPMorgan Chase & Co’s quantitative and derivatives strategists seperately said they saw US$14 billion (RM62.6 billion) of institutional net buying during market hours on Monday.

Among individual stocks, Nvidia Corp rose 3.8%, while other chip stocks also gained. Palantir Technologies Inc rallied after the data-analysis software company raised full-year forecasts, citing demand for artificial intelligence software. Cyber security firm Crowdstrike Holdings Inc was lifted by Piper Sandler advising clients to use beaten-down valuations to buy the shares. Uber Technologies Inc advanced after an earnings beat.

A rush of Wall Street strategists have told clients not to fret over the recent pullback. Bank of America Corp’s Savita Subramanian said drawdowns of 5% or more have occured three times per year on average since the 1930s and 10% corrections once annually, adding that a “full-fledged bear market is unlikely.” 

At Goldman, strategists led by David Kostin said buying US stocks after a slump of the scale witnessed over the past month has tended to be profitable, based on analysis of four decades of data. Since 1980, the S&P 500 has generated a median return of 6% in the three months that followed a 5% decline from a recent high.

Other market players including Jonestrading’s Mike O’Rourke downplayed the setback, telling clients in a note that “a 10% or more correction is absolutely appropriate amid such market strength.”

Concerns of an abrupt downturn were somewhat allayed by numbers Monday showing the US services sector expanded in July after the worst contraction in four years a month earlier. Economic data releases over the coming weeks will be key to gauging the Fed’s next move and the direction of stocks.

“Taking a contrarian approach around these big moves is not a bad approach for active manager and investors,” said Ben Kirby, co-head of investments at Thornburg Investment Management.

Uploaded by Isabelle Francis