Turnaround Tuesday: U.S. stocks rebound after rout
U.S. stocks rebounded on Tuesday, with investors expressing relief after China reduced its benchmark lending rate for the fifth time since November and cut the level of cash reserves required of banks.
The intervention came after the Shanghai Composite Index ended down 7.6 percent, prolonging the biggest four-day decline since 1996.
After a three-day plunge left the Dow industrials and S&P 500 in correction modes, or down 10 percent from spring highs, benchmark indices waged a comeback before relinquishing much of those gains shortly before the close of trade. At 3:42 p.m. ET, the Dow (DJI) was up 21 points, or 0.1 percent, to 15,893. The S&P 500 (spx) was largely flat, down two points to 1,891, while the Nasdaq Composite (comp) added 21 points, or 0.2 percent, to 4,547.
Problems in China's stock market don't indicate problems in the U.S. stock market, nor does a slowing Chinese economy translate into trouble for the U.S. economy, Gus Faucher, senior economist at PNC Financial Services Group, told CBS MoneyWatch. "The concern is more if there is a financial crisis in China," Faucher said.
China's slowing economy does hurt U.S. corporations that export to China, and its devalued currency does make U.S. products less competitive versus Chinese products. U.S. exports to China only represent a fraction of economic growth. "We're talking maybe a 10th of a percentage point of U.S. GDP in a year," Faucher said of the potential impact of China's troubles on the U.S. economy.
On Monday, U.S. stocks took it on the chin for a third consecutive session, with turmoil in China's market exacerbating concerns about the global economy.
"We think this turmoil is temporary. We've had a bull market for six years, and large gains in equity prices in that time. It's normal to see this type of correction," Faucher said. "The fundamentals for the U.S. economy continue to look very good -- we have solid gains in consumer spending, a housing market that is recovering, and we're adding 200,000 jobs a month."
Economic reports released Tuesday bolstered that view. Data had new-home sales bouncing back in July, while a separate report showed consumer confidence rising more than projected in August.
The market is currently pricing in odds of a September rate increase by the Federal Reserve at one in four.
On Monday, Fed Bank of Atlanta President Dennis Lockhart said that while he continues to anticipate a Fed hike this year, the first such move since 2006 could be problematic given the stronger dollar, the weaker Chinese yuan and the declining price of oil.
Uncertainty about the timing of the Fed's move is bolstering market volatility, market analysts say.
"There will be more volatility in the near term until the Fed's outlook becomes clearer," Faucher said.