Stocks kicked off the week with big gains after suffering their worst September in two decades as Treasury yields halted a seemingly endless surge, with weak U.S. manufacturing data soothing concern that the Federal Reserve will overtighten monetary policy.
As a sign of exhaustion of the recent selling, 97% of the S&P 500 shares flashed green, with the gauge up about 3% and on pace for its best day since June.
Aside from being oversold from a technical perspective, extreme pessimism and low fund positioning also fueled a rebound that followed its third-worst performance during the first nine months of a year since 1931.
In a world of bad-economic-news-is-good-news as far as Fed policy goes, a drop in the Institute for Supply Management's gauge of factory activity suggested the economy may be faltering — reducing the urgency for more aggressive hikes.
Equities also managed to gain even in the face of Credit Suisse Group AG's market turmoil and disappointing deliveries from Tesla Inc.
'Lower Lows' to Come
"The market is oversold, and sentiment is extremely negative, so a bounce … even a sharp one … could happen at any time," wrote Matt Maley, chief market strategist at Miller Tabak + Co. "However, we see lower-lows before the ultimate bottom is reached for this bear market … as the stock market has not fully priced-in a recession."
With the equity bounce, the Cboe Volatility Index — the market's so-called fear gauge — tumbled back below 30. The VIX closed above that threshold every day last week.
Nicholas Colas at DataTrek Research said Friday he'd like to see the gauge closing over that mark for several more days before believing on a "tradeable low."
Treasuries surged across the curve, with the five-year yield at one point plummeting over 30 basis points. The 10-year rate sank to 3.6% after recently topping 4% and climbing for nine straight weeks. Swaps tied to Fed policy meeting dates fell sharply for early 2023.
The March meeting contract's rate currently suggests a peak policy rate of 4.40% next year, down from recent highs above 4.60%.
The dollar slipped, yet the latest MLIV Pulse survey showed the greenback is expected to hit new highs over the next month. Gold surged.
