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Stocks rebound: S&P 500 posts best day in three weeks, Dow gains 643 points, or 2.2%

U.S. stocks rose Tuesday as traders returned from a long weekend, with equities recouping some losses following the S&P 500's worst week since March 2020.

The S&P 500 advanced by 2.45% in its best day in three weeks, ending at 3,764.84 and recovering some declines after plunging by 5.8% last week. The Nasdaq Composite gained 2.5% to end at 11,069.30, and the Dow added more than 643 points, or 2.2%, to end at 30,531.77 and post its best single-day gain since May 4.

Bitcoin (BTC-USD) rose back above $21,000 after a cryptocurrency rout briefly sent prices below $18,000 for the first time since December 2020 over the weekend. Treasury yields climbed, with the benchmark 10-year yield increasing to nearly 3.3%, and U.S. crude oil prices rose by 1.5% to top $111 per barrel.

Tuesday's early recovery rally across risk assets came as an at least brief respite amid weeks of heavy selling. The S&P 500 sank into its first bear market since the height of the pandemic last week, and the sell-off ramped even further after the Federal Reserve unleashed a larger-than-typical 75 basis point interest rate hike and signaled it would be willing to tighten further and at the expense of some economic growth to bring down rampant inflationary pressures.

Federal Reserve Chair Jerome Powell is set to deliver his semi-annual address before Congress on Wednesday and Thursday, during which he is likely to be pressed by lawmakers about the Fed's actions to bring down inflation and the extent to which these may weigh on the economy.

And already, concerns over the resilience of the economy have risen sharply. A number of economists at major Wall Street firms downgraded their growth forecasts over the past several days to reflect an increased risk of a recession. A recession is typically defined as two consecutive quarters of negative GDP growth, though the final call is made by the National Bureau of Economic Research (NBER).

"The most likely outlook is very weak growth and persistently high inflation," Bank of America economists wrote in a note Friday. "We see roughly a 40% chance of a recession next year. Our worst fears around the Fed have been confirmed: they fell way behind the curve and are now playing a dangerous game of catch up."

Others have been even more bearish. Deutsche Bank's base case calls for a recession to begin in the third quarter of 2023, following sluggish real GDP growth of just 1.2% in the U.S. in 2022, versus the 1.8% seen previously. Goldman Sachs economists "now see recession risk as higher and more front-loaded," the firm's chief economist Jan Hatzius said in a new note. He raised his recession probability to 30% from 15%.

Rising risks of a formal recession in the U.S. economy also leave the S&P 500 vulnerable to more downside, even after a more than 22% slide so far for the year-to-date. The S&P 500's bear market slides since World War II have averaged 29.6% with an average duration of 11.4 months, according to data from LPL Financial's Ryan Detrick. However, when bear markets coincide with recessions, the S&P 500 tends to fall 34.8% on average at its bear market trough and last nearly 15 months.

NEW YORK, NEW YORK - JUNE 16: Traders work on the floor of the New York Stock Exchange (NYSE) on June 16, 2022 in New York City. Stocks fell sharply in morning trading as investors react to the Federal Reserve's largest rate hike since 1994.  (Photo by Spencer Platt/Getty Images)
NEW YORK, NEW YORK - JUNE 16: Traders work on the floor of the New York Stock Exchange (NYSE) on June 16, 2022 in New York City. Stocks fell sharply in morning trading as investors react to the Federal Reserve's largest rate hike since 1994. (Photo by Spencer Platt/Getty Images) (Spencer Platt via Getty Images)

On the move

  • Kellogg (K) shares rose after the company announced it planned to split into three separate companies. The newly spun out firms will comprise a separate global snack foods company, a North American cereal firm, and pure-play plant-based foods company.

  • Tesla's (TSLA) stock gained after CEO Elon Musk said the company's head count would only be reduced by as much as about 3.5% in the near-term, or a smaller percentage than previously expected. Musk confirmed that 10% of salaried workers at Tesla would be cut over the next three months, but that ongoing hiring would keep the net reduction to just 3-3.5% of the firm's overall workforce, he told Bloomberg News Tuesday.

  • Coinbase (COIN) shares jumped more than 12% as cryptocurrency prices bounced after reaching multi-year lows. The crypto trading platform saw its stock slide nearly 80% for the year-to-date through Friday's close, and shares have traded well below their reference price of $250 apiece from the time of Coinbase's April 2021 direct listing.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter.

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