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Stocks Rebound as Fed Fears Fuel Big Swings

NEW YORK (TheStreet) -- Investors were on a rollercoaster again on Wednesday after stocks surged following Tuesday's slump.

The Dow Jones Industrial Average and S&P 500 recovered after re-entering a correction earlier this week. The S&P 500 closed 1.8% higher, and the Nasdaq gained 2.5%. The Dow added 1.8%, led by gains in Apple (AAPL - Get Report) , Microsoft (MSFT - Get Report) , and Intel (INTC - Get Report) .

The Volatility Index (VIX.X) , commonly referred to as the "fear index," fell 13.4% to 27.18. Volatility eased after a rollercoaster five days last week.

Reports of strong growth in the Federal Reserve's "Beige Book" helped to support the U.S. economic economy, but also fueled volatility as traders feared it backed up a September hike. U.S. economic activity continued to expand from July to mid-August, according to the report, an anecdotal account of conditions across the twelve Fed districts. Federal districts said they expect growth to remain at its current pace.

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Most of the districts reported "modest to moderate" labor demand, while five districts said that a stronger dollar has had a "weakening influence" on manufacturing. However, the energy sector was the biggest drag on districts' growth.

"Districts reporting on the energy sector indicated that conditions were stable to declining; coal production was down in the Richmond and St. Louis Districts, while oil-related activity declined in the Cleveland, Atlanta, and Dallas Districts." the report said.

Investors have shown nerves recently that the Fed will raise rates in September given the strength of the U.S. economy even as the global economy falters. Fed members will meet on Sept. 16-17. The market-implied probability of a rate hike has fallen below 50% even as economic data continues to support a U.S. recovery.

"With the markets so intensely focused on both the timing of a Fed interest rate hike and the possibility of slowing global growth, each data release is receiving heightened scrutiny," Bill Stone, chief investment strategist at PNC Asset Management Group, wrote in a note. "We are seeing an increased correlation between volatility and data releases, regardless of the necessity to assess the full picture, as is the Fed's position."

West Texas Intermediate crude bounced back from an earlier drop, closing up 1.9% to $46.25 a barrel. Crude oil had been under pressure after U.S. inventories added 4.7 million barrels last week. Analysts had expected inventories to fall by 800,000 million barrels after a drop of 5.5 million the week earlier. Crude had dropped more than 7% on Tuesday, ending a three-day rally which was its best in 25 years.

President Barack Obama received support from the 34th member of the Senate to back an Iranian nuclear deal. Sen. Barbara Mikulski's vote means the deal will not be killed in Congress. A deal would mean the easing of Iranian sanctions, which means even more oil on global markets, in exchange for comprehensive nuclear inspections.

Private payrolls in the U.S. added far fewer jobs than expected in August, according to the latest ADP report. The private sector added 190,000 jobs over the month, up from 185,000 in June but below estimates of 210,000. The report comes ahead of the official U.S. jobs report on Friday.

U.S. productivity in the second quarter was revised up to a 3.3% annual pace, more than double original estimates of 1.3%. The revision was driven by a correction to second-quarter GDP that showed growth much stronger over the quarter than originally estimated. The increase was its biggest in nearly two years. Hourly worker wages was unchanged at 1.8%.

Factory orders rose 0.4% in July, a second month of gains, though they were far weaker than expected growth of 0.9%. June factory orders were revised up to 2.2% from 1.8%.

Markets suffered big losses on Tuesday as 499 stocks in the S&P 500 closed negative, the second highest reading since 1996. Those losses were only topped by a selloff in August 2011 which saw all 500 stocks in the red, according to MKM Partners.

"All of this suggests that while a bounce could materialize today, it's far too early to look for 'the bottom' in our view," said Jonathan Krinsky, chief market technician at MKM Partners.

GoPro  (GPRO - Get Report) fell more than 5% after its largest semiconductor supplier, Ambarella (AMBA) , shared a disappointing outlook for wearable cameras. Ambarella said it expects third-quarter revenue to fall given the product launch of competing cameras from Xiaomi.

Vera Bradley (VRA) rocketed 27% higher after a better-than-expected quarter. The accessories designer earned 15 cents a share, 4 cents above estimates. Sales jumped 1.5% to $120.7 million and beat expectations by $5.71 million.

AT&T (T) added 1.6% after Goldman Sachs upgraded the stock to "buy," noting that an 11% correction presents attractive valuation given dividends and the merger of DirecTV.

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AAPL $112.34 4.29%
INTC $28.60 2.80%
GPRO $41.28 -5.52%
MSFT $43.36 3.68%
FB $89.89 3.05%


Chart of I:DJI
DOW 16,351.38 +293.03 1.82%
S&P 500 1,948.86 +35.01 1.83%
NASDAQ 4,749.9790 +113.8740 2.46%

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