The Dow Jones Industrial Average climbed 2.3 percent on Tuesday, snapping a two-day losing streak and leading gains by the major U.S. indexes.
The Dow's increase of 567 points erases most of Friday's losses but doesn't touch the index's 1,175-point drop on Monday, the largest decline in its history by that measure. On a percentage basis, slides in the panic of 1929 and the Black Monday crash of 1987 were considerably larger.
The broader S&P 500 climbed 1.5 percent, while the tech-heavy Nasdaq Composite Index rose 2.1 percent.
The Dow's rally, which faded several times during a volatile session only to reappear, followed an initial drop of 500 points, or more than 2 percent, at the start of trading. The market plunge had previously assumed a global character, with exchanges like Japan's Nikkei 225 closing lower in Tuesday trading and the German DAX registering losses.
"We haven't had a correction of more than 3 percent in 18 months or so," said Tony Roth, chief investment officer at Wilmington Trust, which manages $83.5 billion in assets. "Given the gains that we've accomplished, the market was very, very overdue for a correction."
The selloff, which began Friday with a report of stronger January job-market growth that might push the Federal Reserve to raise rates more rapidly than expected, was exacerbated by programmed trading linked to specific price levels and value fluctuations, Roth told the Washington Examiner.
Such automated trades mean "directional trends in the market become magnified by a significant amount," he said Tuesday afternoon. "That's something we've seen in volatile periods over this entire market cycle. Having said all that, the economic data continues to be strong. We feel very confident this is nothing more than a selloff, and potentially a buying opportunity."
Historically, pullbacks prompted by positive economic news have averaged about 5 percent, UBS equity strategist Keith Parker said in a report, which indicated the selloff was nearing its end after a 7 percent decline on the Dow Jones in two days and a 6 percent drop on the S&P 500.
“After-tax paychecks will rise 2 percent to 4 percent this month, making a sustained negative-data backdrop highly unlikely,” Parker wrote.
Like Roth, Deutsche Asset Management Chief Investment Officer Stefan Kreuzkamp said much of the selloff was related to automated trading, some linked to bets that options tied to volatility levels would lose value.
Indeed, Zurich-based Credit Suisse said Tuesday it would close its XIV exchange-traded notes — securities that essentially reward investors when market volatility is low — after they lost roughly 80 percent of their value in a single day.
Another factor in the selloff is that with yields on two-year Treasuries above 2 percent, outpacing the dividend yield of the S&P 500, stock markets are no longer the only place where investors can get a significant return, Kreuzkamp noted in a post on the firm's website.
"Given that until recently, investor sentiment was near record highs, we certainly think that some sort of correction was indeed overdue," Kreutzkamp wrote. "For stock pickers, such phases can certainly bring opportunities."
