Surprising Rebound In Stock ETFs Is Explainable

The S&P 500 jumped 8% in a matter of days, erasing more than half of its peak-to-trough losses.

sumit
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Senior ETF Analyst
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Reviewed by: Sumit Roy
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Edited by: Sumit Roy

Little has changed fundamentally, yet investors are in a much more ebullient mood following a stunning rebound in stocks over the past week. From Tuesday of last week through Tuesday of this week, the S&P 500 rallied in five of six sessions, gaining a whopping 8% in the period.

At Tuesday’s close, the index was down a mere 5.9% from its all-time highs, more than cutting in half its peak-to-trough losses of 13%.

The comeback was even more furious in beaten-down corners of the market. The ARKK Innovation ETF (ARKK) surged 28% from last Monday’s low through this Tuesday’s high; the Vanguard Information Technology ETF (VGT) gained 12.2%; the Renaissance IPO ETF (IPO) climbed 23.5%; and the De-SPAC ETF (DSPC) jumped 22.6%.

Some bruised and battered individual stocks spiked 30%, 40%, 50% or more in a matter of days.

Perhaps the most remarkable part of the stock market comeback is that it took place at the same time that interest rates were spiking. The U.S. two-year and 10-year Treasury bond yields rose in eight of the 10 trading days through Tuesday.

They each surged more than 25 basis points since stocks’ March 14 lows, with the ascent picking up steam after last week’s hawkish Fed policy decision and commentary. This week, Fed officials seemed to ratchet up their hawkishness, with Chair Powell suggesting that hikes of 50 basis points in the federal funds rate were possible at upcoming meetings.

Bond ETFs, including the iShares 20+ Year Treasury Bond ETF (TLT), the iShares 7-10 Year Treasury Bond ETF (IEF), the iShares Core US Aggregate Bond ETF (AGG) and the iShares iBoxx $ High Yield Corporate Bond ETF (LQD) tumbled to their lowest levels since early to mid-2019 amid the spike in yields (bond prices and yields move inversely).

The rout in bonds has been so severe that, according to Bloomberg, this is the worst peak-to-trough decline in the global bond market since at least 1990.

Surprising Resilience

The fact that stocks have been so resilient in this environment is surprising. For much of this year, concerns about rapid inflation, rising rates and geopolitics have put continuous pressure on stocks. None of those worries has disappeared, and if anything, they’ve intensified.

But in typical market fashion, just when you think things can only go one way, they do a 180. The Fed decision last Wednesday was a trigger for investors to “buy the news” after they had “sold the rumor” of a more hawkish central bank for many weeks prior.

True, nothing had changed (at least for the better), but investors had sold down parts of the stock market to what were arguably extreme levels. It might not have been evident in the S&P 500’s relatively modest 13% decline, but it was clearly visible in pockets of the high growth stock universe.

Nothing goes up or down in a straight line without pause. The market could very well revisit its lows, or even break below them, but it will probably take a sharper deterioration in the macro backdrop for it to happen.

 

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Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.