Dow Soars 600 Points After Worst Week In Two Years

US equities rallied on Tuesday, the first trading day following last week’s selloff. The Dow (INDU) closed up 641 points, or 2.1 percent, after rising more than 700 points in the afternoon. The S&P 500 (SPX) gained 2.5 percent, while the Nasdaq (COMP) gained 2.5 percent. The market had its worst week since March 2020 last week.

In Tuesday’s trading, the holiday-shortened week swung to the upside as oil prices and other commodities appeared to swing back  to prior levels in price, raising investor sentiment and the hope that the Federal Reserve’s attempts to reign in inflation without precipitating a near-term recession are succeeding.

The price of oil rose somewhat on Tuesday, although the benchmark Brent crude is still roughly $10 off its recent highs. Gas prices have fallen below $5 per gallon, providing some respite. Iron ore and copper prices have also dropped. Meanwhile, President Joe Biden will travel to Saudi Arabia this week to discuss increasing oil production.

Bitcoin has risen back above $20,000 following a significant decline in cryptocurrency prices that pushed it below $18,000 over the weekend. Treasury yields rose as well, with the 10-year yield rising to 3.3 percent. Tuesday’s rally was broad, with nearly all members of the S&P 500 rising.

During bad markets, large bounces are common. According to Sam Stovall, chief investment strategist at CFRA Research, the S&P 500 has gained more than 2% on ten previous occasions since its last top in January but has given up the gains and moved lower each time.

US equities gained somewhat on Friday, but they still suffered big losses last week when the Federal Reserve declared that it will raise interest rates by three-quarters of a percentage point, the greatest increase in 28 years, in an effort to control inflation. On Wednesday, Fed Chair Jerome Powell told Americans that he was unsure if it would be possible to cut inflation without harming the US economy.

“I think that what’s becoming more clear is that many factors that we don’t control are going to play a very significant role in deciding whether that’s possible or not,” he said.

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The S&P 500 fell about 6% last week, marking its lowest week since 2020. The Dow dropped 1,504 points or approximately 5%.

This week, the Fed is once again in the spotlight. Powell will testify before the Senate Banking Committee on Wednesday and the House Financial Services Committee on Thursday as part of his semi-annual congressional testimony on the Fed’s activities. With little else in the way of economic or earnings data, investors will most likely look to his testimony to evaluate their opinion in the coming months.

US stocks have entered an economic downturn, falling more than 20% since reaching a record high on January 3. However, equities may have a lot more room to fall, especially if economists’ projections come true and the US economy enters a recession.

Investors suffer during recessions. According to Stovall, bear markets during recessions have traditionally been longer and deeper than bear markets not related to economic downturns. Stocks have plummeted 28 percent in bad markets without recessions since World War II, and 36 percent in recessions.