US stocks survive barrages as sell-off low becomes rally start

The jobs report on Friday was bad, but not bad enough to trigger another selloff. Photo: AP

While everything from Glencore to the Labor Department threw punches at US stocks this week, nothing landed the knockout blow.

The Standard & Poor's 500 Index ended the week with a gain of 1 per cent, rebounding from a loss of more than 2.5 per cent on Monday after Glencore roiled global markets and a 1.6 per cent retreat on Friday following a monthly US employment report. Industries from biotechnology to raw materials bounced back after reaching lows for the year.

Investors fought back after stocks tumbled toward the lows of August's selloff, when the S&P 500 entered its first correction in four years.

On Friday, indexes jumped over 1 per cent as worries about the economy after the jobs report gave way to a robust rally in energy and materials stocks. The three major indexes clawed back losses of more than 1.5 per cent. While the poor payroll data hinted at economic weakness, it also strengthened the argument for the Federal Reserve to delay its long-awaited interest rate hike.

"A lot of the nervous money has already left the market," said Walter "Bucky" Hellwig, who helps manage $US17 billion as a senior vice president at BB&T Wealth Management in Birmingham, Alabama. "If there was any day you could make the case for the market going down, it's on the Friday of a weak employment report, but the market stabilised and that's encouraging."

US equities have seesawed between gains and losses since August's selloff, as investors wrestle with concerns about a slowing global economy and confusion over the Fed' plans for higher interest rates. The two issues have haunted financial markets for months, resulting in the worst quarterly performance for global equities in four years.

Jobs report

The S&P 500 started the week with its biggest decline in a month, dropping 2.6 per cent as London-based Glencore plunged 29 per cent, becoming the latest victim of China's sputtering economy and a selloff in commodity prices. The benchmark equity gauge lost as much as 0.5 per cent on Tuesday before staging a late recovery that led into a 1.9 per cent rally the next day. That set the stage for Friday's release of government jobs data.

The report showed payrolls rose less than projected in September, sending stocks plummeting at the open amid concern the global slowdown and financial-market turmoil are rippling through the world's largest economy. Buyers started jumping in by late morning, and equities gathered momentum to end the day up 1.4 per cent. The recovery was the biggest intraday rebound from a loss of more than 1.5 per cent since October 2011.

While the weak report vindicated the Fed's decision to delay an interest-rate increase last month, the debate continued over whether the US economy is strong enough to weather weakness from overseas.

As stock charts fluctuate, some traders are betting on a more lasting turnaround in the S&P 500. Their faith can be measured in the market capitalisation and outstanding shares of a security that has come to serve as a proxy for the strategy known as shorting volatility. Both values are close to a four- year high and have held steady amid price swings in the market.

Most shorted

The S&P 500's late-week recovery mirrored performance in a Goldman Sachs basket of the 50 most-shorted companies in the Russell 3000 Index. The group of stocks slipped 6.7 per cent to start the week, only to rebound 6.1 per cent from Wednesday to Friday.

In addition to volatility remaining high, there are other signs stocks may not have reached a bottom. While the S&P 500 itself has shown resilience, ending the week 4.5 per cent above the August 25 closing level, a third of the stocks in the index are trading below their lows. Apple, Microsoft and Exxon Mobil, the three largest companies by market cap, account for about 15 per cent of gains since the market bottomed.

Some industries managed to show signs of strength by Friday. Energy and raw-materials companies, the worst performers of the year among 10 groups in the S&P 500, had the best showing for the five days, rallying more than 2.7 per cent.

Stocks that benefit in a low-rate environment got a boost, while financial shares slumped. An index of bank stocks slipped 1.5 per cent as sustained low rates are starting to put pressure on bank margins, while higher interest rates would enable banks to earn larger spreads on deposits.

While the debate over interest rates and the economy continues in the coming week, investors will get more to contemplate as earnings season begins. Steel giant Alcoa will present its results after the market close on October 8. Companies in the benchmark index are expected to see a slight earnings contraction of 0.1 per cent for the year.

"With the correction we've seen, valuations have come back to attractive levels," said Christian Preussner,  managing director of US equities at JPMorgan Asset Management. "I think that the companies' earnings will be proving that the companies in the US are very well positioned and that they are attractive."

Bloomberg