The stock market is bouncing back. 3 reasons why investors buy the bottom.
Shares rebounded Thursday after a sharp sell off Wednesday. Now is the time, it seems, to buy the dip.
Dow Jones Industrial Average
rose 375.69 points, or 1.3%, on Thursday while the
gained 1.1% and the
rose 0.6%. The rebound comes after Wednesday’s sell-off, which was boosted by higher-than-expected consumer inflation. Higher inflation lowers stock valuation, all other things being equal, and Wednesday’s CPI impression forced the market to adjust on the fly.
However, not everything else is created equal. Here are three reasons why stocks are winning on Thursday:
The market was oversold. Each of the three major US indices has fallen at least 4% from all-time highs, all reached this month. However, this does not even fully reflect the extent of recent pessimism. The NYSE TICK reading – a measure of the stock market’s rises versus falls at one point in time – hit a negative 1,800 on Tuesday and Wednesday, according to data from Instinet, the first time the measure even reached a negative value of 1800 or worse for two consecutive days. The sentiment was so poor that investors could not help but return to the market. Investors are showing “some trough buying,” writes Dennis DeBusschere, head of portfolio strategy research at Evercore.
Investors digested the inflation news. Wednesday’s CPI reading came as a shock, but now such readings have lost the ability to shock, at least for now. For example, the April Producer Price Index, released Thursday morning, topped estimates with a 6.2% year-over-year increase for April, and the market did not respond . It has also helped many economists and financial journalists attribute the rise in inflation to pandemic quirks that may, in fact, be transient. Then again, this could also be due to the fact that higher inflation can be good for the stock market. On days when inflation expectations have risen over the past year, the S&P 500 has gained 0.45% on average, according to data from Credit Suisse. From a market point of view, inflation. if not out of control, it may indicate a strengthening of economic demand, which generates income and profits.
Profit estimates continue to riseg. While the last companies in the S&P 500 reported earnings, analysts are still revising their estimates upwards. According to Evercore, profit growth for the first quarter is now 50% year-on-year, down from just over 20% at the start of the reporting season. And history shows that stocks generally continue to rise when profits rise 25% or more from their lows, according to Robert Buckland of Citigroup. “History says to remain optimistic in the first year of the BPA recovery,” Buckland says.
Write to Jacob Sonenshine at [email protected]