Stocks rose solidly on Monday, recovering some of the losses from the previous session's steep sell-off, but investors remained wary about the bounce as coronavirus fears lingered.
Nike led the Dow higher with a 3.1% rise after analysts at UBS and JPMorgan recommended buying the stock on coronavirus-related weakness. JPMorgan called this recent pullback a "multi-year buying opportunity." Tesla, meanwhile, jumped more than 19% to record levels after an Argus Research analyst hiked his price target on the stock to $808 per share.
The major averages reached their session highs after the Institute for Supply Management said its manufacturing gauge showed activity in the sector expanded. Economists polled by Dow Jones expected a contraction in manufacturing activity for January. The 30-stock Dow was up more than 350 points at its high of the day.
However, stocks gave back some of Monday's gains after Carnival confirmed one of its guests tested positive for coronavirus six days after leaving one of its ships. Carnival shares erased earlier gains and closed more than 1% lower on the news.
"The shorter-term uncertainty around the coronavirus is really affecting everything," said JJ Kinahan, chief market strategist at TD Ameritrade. "You may continue to see sort of reallocation."
The death toll in China from the coronavirus reached 361 on Sunday, surpassing that of the SARS virus which lasted from 2002 to 2003, while a first death outside of China was reported in the Philippines.
Worries about how the virus would impact the global economy dented U.S. stocks in their final trading day of January. The Dow dropped 603 points, or more than 2%, on Friday. The S&P 500 pulled back 1.8%, its biggest one-day drop since October.
"We had that sharp sell-off on Friday, so it's natural to see a bounce-back," said Keith Lerner, chief market strategist at Truist/SunTrust Advisory. "But we think this corrective period has a bit more to go."
He noted that, historically, S&P 500 pullbacks last an average of 47 calendar days. Those periods have led to an average loss of more than 9%. The S&P 500 started to take a hit from coronavirus fears 17 calendar days ago, with the broad index losing more than 2% in that time. "We don't have the all-clear yet," Lerner said.
Investors also increased their exposure last week to Treasurys and loaded up on protection in the options market. The 10-year Treasury yield fell on Friday to 1.505%, pushing the note's price higher. The benchmark rate climbed back to around 1.52% on Monday.
Stocks in mainland China plummeted overnight in their first session since closing for the Lunar New Year holiday. The Shanghai Composite tanked by 7.7%. The Shenzhen Index fell by 8.4%. Japanese stocks also declined Monday, with the Nikkei 225 pulling back by 1%.
Yet, U.S. investors are seemingly buying the dip after the S&P 500 and Nasdaq recorded their worst start to a trading year since 2016.
"We are looking for higher highs in the S&P 500 Index once the Coronavirus fears subside," said Marc Chaikin, CEO of Chaikin Analytics, in a note. "Buying opportunities abound in strong sectors and industry groups."
But Mohamed El-Erian, chief economic advisor at Allianz, advised investors to hold off on adding equity exposure at this point.
"The coronavirus is different. It is big. It's going to paralyze China. It's going to cascade into the global economy," El-Erian told CNBC's "Squawk Box" on Monday. "We should try and resist our inclination to buy the dip."
—CNBC's Elliot Smith contributed to this report.