Calm returns to Wall Street as U.S. stocks stabilize following recent volatility

Stocks closed higher on Wall Street as calm returned to the market a day after its biggest pullback in almost two years.

The S&P 500 rose oneper cent Tuesday, breakinga brutal three-day losing streak. It had tumbled a bit more than sixper centafter several weaker-than-expected reports raised worries the U.S. Federal Reserve had pressed the brakes too hard for too long on the U.S. economy through high interest rates in order to beat inflation.

The Dow Jones industrial average climbed 0.8 per cent by close, and the Nasdaq composite added oneper cent.

The vast majority of stocks were climbing in a mirror opposite of the day before from smaller companies that need U.S. households to keep spending to huge multinationals more dependent on the global economy.

Meanwhile, the TSXcloseddown 1.12per cent on Tuesday.Canada's main stock index was shuttered on Monday for the bank holiday, and on Fridayit closed down2.1 per cent, its steepest daily drop since mid-February.

"Canadian stocks didn't go down yesterday because the market was closed [and] now they're catching up. There'll be a big gap down this morning to adjust for that," said Colin Cieszynski, chief market strategist at SIA Wealth Management.

The TSX has "more traditional" segments of the economy than major U.S. indexes, saidMartin Pelletier, asenior portfolio manager at Wellington-Altus Private Counsel.

WATCH | CBC's Scott Peterson breaks down early trading on Tuesday morning:

North American markets hold steady in early hours after U.S. tumult

2 months ago

Duration 3:26

CBC'S Scott Peterson looks at the volatility that roiled U.S. markets on Monday and how markets are reacting early Tuesday.

During major market events like the one that transpired in the last few days, "you get a little bit more of a smoother type of reaction," hesaid. "We haven't benefited to the same extent on the rally, but we haven'tparticipated in the downside.

"Having said that, there is a correlation between all global markets, and so a U.S. correction will dragon the Canadian market as well."

'Perfect storm' behind heavy marketlosses

Stronger-than-expected profit reports from several big U.S. companies helped support the market. Kenvue, the company behind Tylenol and Band-Aids, jumped 12.7 per centafter reporting stronger profit than expected thanks in part to higher prices for its products. Uber rolled 7.9per centhigher after easily topping profit forecasts for the latest quarter.

Caterpillar veered from an early loss to a gain of 3.8per cent after reporting stronger earnings than expected but weaker revenue.

Several technical factors may have accelerated the recent swoon for markets, beyond the weak U.S. hiring data and other reports, in what strategists at Barclays call "a perfect storm" for causing extreme market moves.

One is centred in Tokyo, where a favourite trade for hedge funds and other investors began unraveling last week after the Bank of Japan made borrowing more expensive by raising interest rates above virtually zero.

That scrambled trades where investors had borrowed Japanese yen at low cost and invested it elsewhere around the world. The resulting exits from those trades may have helped accelerate the declines for markets around the world.

Japan's Nikkei 225 jumped 10.2 per cent on Tuesday to claw back much ofits 12.4 per centsell-off the day before, which was its worst since the Black Monday crash of 1987. Stocks in Tokyo rebounded as the value of the Japanese yen stabilized a bit against the U.S. dollar following several days of sharp gains.

"The speed, the magnitude and the shock factor clearly demonstrate" how much of the moves were driven by how traders were positioned, rather than just worries about the economy, according to the strategists at Barclays led by Stefano Pascale and Anshul Gupta.

Still, some voices along Wall Street are continuing to urge caution.

Barry Bannister, chief equity strategist at Stifel, is warning more drops could be ahead because of a slowing U.S. economy and sticky inflation.

He's forecasting both will be worse in the second half of this year than what much of Wall Street expects, while saying a measure of how expensive the U.S. stock market is still looks "frothy" when compared with bond yields and other financial conditions.

The stock market's "dip is not a blip," he warned in a report, and called it "too soon to jump back in."

Bannister had been predicting a coming "correction" in U.S. stock prices for a while, including an acknowledgement in July that his initial call was early. That was a couple of days before the S&P 500 set its latest all-time high and then began sinking.

While fears are rising about a slowing U.S. economy, it is still growing, and a recession is far from a certainty. The U.S. stock market is also still up a healthy amount for the year so far. The S&P 500 has romped to dozens of all-time highs this year, in part due to a frenzy around artificial intelligence technology, and critics have been saying prices looked too expensive.

Elsewhere, European markets were mostly left out of the rebound, with stock indexes down modestly in Germany, France and the United Kingdom.