Stocks rallied at the end of a chaotic week in financial markets, with a little help from Federal Reserve Chair Jerome Powell’s reassurance that bigger rate hikes would be off the table for now even after the hot inflation readings of the past few days.

For a market plagued by fears that more aggressive monetary tightening could tip the economy into a recession, Powell’s remarks ended up soothing frayed nerves and sparking a rebound in beaten-down risk assets. Despite the strong gains on Friday, many traders aren’t yet convinced that equities have reached a bottom after a selloff that shaved US$10 trillion from US stock values in 18 weeks. Instead, they say investors should still brace for volatility as the Fed’s ability to fight price pressures without causing a hard landing may depend on factors outside the central bank’s control.

After sinking almost 20 per cent from a record and flirting with a bear market, the S&P 500 saw a broad-based rally Friday. It still posted a sixth straight week of declines -- the longest losing streak since June 2011. The Nasdaq 100 outperformed amid a rally in giants like Apple Inc., Microsoft Corp. and Amazon.com Inc. Meanwhile, Elon Musk caused chaos over his takeover offer for Twitter Inc., first claiming his bid was “temporarily on hold” and then maintaining he’s “still committed” to the deal -- sending the social-media giant into a tailspin. Tesla Inc. jumped. Treasuries fell with the dollar.

Over the course of another tumultuous week for financial markets, some prominent voices on Wall Street pondered on the outlook for stocks after a powerful selloff. Peter Oppenheimer at Goldman Sachs Group Inc. said on Tuesday that the rout had created buying opportunities, with headwinds such as inflation and hawkish central banks already priced in. Meantime, Morgan Stanley strategist Michael Wilson noted that equities were still “not priced for this slowdown in growth from current levels.”

There are five telltale indicators that are used to call a bottom in stocks, including spikes in the Cboe Volatility Index, puts substantially outnumbering calls and a dismal market sentiment, according to Lindsey Bell, chief markets and money strategist at Ally. While the VIX has stayed near 30, past bear markets featured moves above 45. “A volatility climax is a signature of market bottoms,” she said.

Comments:

• “Much speculative froth has already been removed from the market,” wrote Mark Haefele, chief investment officer at UBS Global Wealth Management. “So, we advise against a hasty exit. Our central scenario is also that a recession will be avoided over the next 12 months. However, investors should continue to brace for high levels of volatility.”
• “We’ve certainly revalued the stock market in a big way,” Jim Paulsen, chief investment strategist at Leuthold Group, told Bloomberg Television and Radio. “Really great fear on Main Street, on Wall Street, combined with, I think, ongoing good fundamentals -- including strong balance-sheets in the household sector, the corporate sector and the banking industry -- I think that’s a ‘dynamite’ combination you have to buy on.”
• “Investor sentiment is at extreme levels and technical indicators are universally negative,” said Mark Hackett, chief of investment research at Nationwide. “This reflects the degree of pessimism embedded in the market, setting the stage for a bounce from oversold levels, which could be expected in the coming weeks.”
• “There was a sense of calm in the markets, but again without any fundamental news to suggest this is perhaps the bottom,” wrote Fawad Razaqzada, an analyst at City Index and FOREX.com. “Stocks have struggled to sustain any recovery attempts as traders have been quick to take profit on rebounds amid a bearish macro backdrop.”

Expectations of a technical bounce in the S&P 500 are building after the gauge’s relentless slide of the past several weeks. One possible zone of support comes from a cluster of Fibonacci levels -- which captures retracements of rallies in the American equity benchmark from 2020 COVID crash lows.

Equities, bonds, cash and gold all saw outflows in the week ended May 11, Bank of America Corp. strategists led by Michael Hartnett wrote in a note, citing EPFR Global data. At US$1.1 billion, technology stocks suffered their biggest withdrawals so far this year, second only to financials, which lost US$2.6 billion.

“The definition of true capitulation is investors selling what they love,” Hartnett said, citing assets like big tech, for example. “Fear and loathing suggest stocks are prone to an imminent bear-market rally, but we do not think ultimate lows have been reached.”

Some of the main moves in markets:

Stocks

• The S&P 500 rose 2.4 per cent as of 4 p.m. New York time
• The Nasdaq 100 rose 3.7 per cent
• The Dow Jones Industrial Average rose 1.5 per cent
• The MSCI World index rose 2.3 per cent

Currencies

• The Bloomberg Dollar Spot Index fell 0.3 per cent
• The euro rose 0.2 per cent to US$1.0401
• The British pound rose 0.3 per cent to US$1.2241
• The Japanese yen fell 0.8 per cent to 129.32 per dollar

Bonds

• The yield on 10-year Treasuries advanced nine basis points to 2.93 per cent
• Germany’s 10-year yield advanced 11 basis points to 0.95 per cent
• Britain’s 10-year yield advanced eight basis points to 1.74 per cent

Commodities

• West Texas Intermediate crude rose 4 per cent to US$110.36 a barrel
• Gold futures fell 0.9 per cent to US$1,808.40 an ounce