U.S. Stocks Rise After Two Turbulent Weeks

U.S. stocks bounced higher Monday following two bruising weeks, lifted by a rally in shares of oil-and-gas companies.

The Dow Jones Industrial Average jumped 411 points, or 1.6%, to 24602, following its largest one-week percentage decline in more than two years. The S&P 500 rose 1.4% and the Nasdaq Composite added 1.5%.

Monday’s gains were broad, lifting 10 of the S&P 500’s 11 sectors higher for the day. Still, major stock indexes remain sharply lower for the month, following a heavy bout of selling that analysts and investors have attributed to failed bets on low stock market volatility, rising bond yields and concerns about a possible pickup in inflation.

Investors have been questioning whether the declines, which have erased the S&P 500 and Dow industrials’ gains for the year, reflect a short-term technical correction or the start of a more profound reassessment of the financial climate in light of less support from central banks. 

“I think this is a healthy squeezing out of some over-optimism,” said James Norman, head of equity strategy at QS Investors. Still, if inflation rises faster than expected, the Federal Reserve will need to pick up the pace on interest-rate increases, which would also lift government bond yields. That could hurt growth and reduce the appeal of companies that have taken on a lot of debt, he added.

Shares of energy companies rose with oil prices Monday, giving major indexes a boost.

The S&P 500 energy sector rose 1.8%, among the biggest gains of the broad index’s 11 sectors, while U.S. crude oil rose 1.1% to $59.87 a barrel after sliding last week on worries about rising U.S. production.

Meanwhile, government bonds weakened, with the yield on the benchmark 10-year U.S. Treasury note—which rises as bond prices fall—recently at 2.862%, compared with 2.829% Friday. Rising bond yields had spooked some equity investors last week, raising concerns about the possibility of central banks increasing interest rates faster than expected.

“The economy is truly improving and interest rates are truly heading higher—the average investor did not really believe that,” said Brian Belski, chief investment strategist at BMO Capital Markets. “All of a sudden, a dose of reality came in,” he added.

Kokou Agbo-Bloua, global head of flow strategy and solutions at Société Générale, described the recent pullback in stocks as primarily an unwinding of crowded trades, exacerbated by a need to cover short positions on volatility.

“We aren’t seeing panic of any sort,” he said, although he noted the next few days would be very important to watch for any kind of negative feedback loop.

Outside the equity market, demand for haven assets such as gold has been muted, while stocks and bonds in emerging markets and riskier pockets of Europe have held up well, suggesting investors remain encouraged about the global economy. Credit spreads have mostly remained tight, reflecting continued optimism about the outlook for the corporate sector.

“The reaction in [credit] spreads, for the time being, has been relatively muted because of the good fundamentals of corporate balance sheets,” said Gilles Pradère, fixed income portfolio manager at RAM Active Investments.

Earlier, stocks across Europe rallied, lifting the Stoxx Europe 600 up 1.7%.

The Shenzhen Composite, home to smaller-cap stocks in China, led gains in Asia, jumping 2.6% after coming under pressure last week. The Shanghai Composite rose 0.8%, its biggest gain since January 23.

Over the weekend, state-run media reported that the period of volatility for Chinese stocks may be over, said Ivan Ip, a stocks strategist at UOB Kay Hian. “That was taken as a cue to invest by local traders,” he added.

South Korea’s Kospi closed up 0.9%, while Hong Kong’s Hang Seng reversed gains late in the session to edge down 0.2%. Markets in Tokyo were shut for a holiday.