Rollercoaster week in US stocks leaves investors eyeing bumps ahead By Reuters
Written by David Randall
NEW YORK (Reuters) – A week of market volatility has investors looking ahead to data on inflation, corporate earnings and presidential polls for signs that could ease the upsurge in U.S. retail unrest.
After months of tepid trading, volatility in U.S. stocks increased this month as shock data came to a close in large-scale trade, fueled by the yen facing its worst sell-off in a year. The figure is down about 6% from last month's record high, even after a series of rallies after Monday's selloff.
The problem for many investors is the direction of the US economy. After months of betting on a soft economic environment, investors rushed to price the risk of a major downturn, following weaker-than-expected manufacturing and employment data last week.
“Everybody is worried about the economy right now,” said Bob Kalman, portfolio manager at Miramar Capital. “We are moving away from the selfish part of the plan and now the market is dealing with fears of major country risks, tight elections and persistent volatility.”
Although stocks have rallied in recent days, traders believe it will be a while before calm returns to the markets. Indeed, the historical behavior of the Cboe Volatility Index — which saw its biggest one-day jump on Monday — shows that increases in volatility often take months to dissipate.
Known as Wall Street's fear gauge, the index measures the need for options protection against market volatility. When it closed above 35 – the highest level raised on Monday – the index took 170 times on average to return to 17.6, its long-term median and the level associated with the least concern for investors, a Reuters analysis showed.
Another potential flashpoint will be when the US reports consumer price data on Wednesday. Signs that inflation is easing further could fuel fears that the Federal Reserve is sending the economy into crisis mode by leaving interest rates high for too long, contributing to market volatility.
Currently, futures markets are pricing in a 55% chance the central bank will cut interest rates by 50 basis points in September, at its next policy meeting, compared to the roughly 5% chance seen last month.
“Slow wage growth reinforces that risks to the US economy are reversing as inflation cools and employment slows,” said Oscar Munoz, chief US macro strategist at TD Securities, in a recent note.
Corporate earnings, on the other hand, have not been strong enough or weak enough to provide market guidance, said Charles Lemonides, head of hedge fund ValueWorks LLC.
Overall, companies in the S&P 500 reported second-quarter results that were 4.1% above expectations, in line with the long-term average of 4.2% above expectations, according to LSEG data.
Walmart (NYSE: ) and The Home Depot (NYSE: ) are among the companies reporting earnings next week, and their results are seen as providing a snapshot of how US consumers are holding up after months of higher interest rates.
The end of the month brings a profit from chip giant Nvidia (NASDAQ: ), whose shares are up nearly 110% this year even after the recent selloff. The Fed's annual Jackson Hole meeting, scheduled for August 22-24, will give policymakers another chance to fine-tune their monetary policy message ahead of their September meeting.
Lemonides believes the recent volatility is a healthy correction during a strong bull market, and initiated a position in Amazon.com (NASDAQ: ) to take advantage of its weakness.
The US presidential race is also likely to increase uncertainty.
Democratic front-runner Kamala Harris leads Republican Donald Trump 42% to 37% in the race for the November 5 presidential election, according to an Ipsos poll published Thursday. Harris, the vice president, entered the race on July 21 when President Joe Biden folded his campaign following a disastrous June 27 debate against Trump.
It's almost three months until the Nov. 1 vote. 5, investors are in for a lot of twists and turns in what has already been one of the most dramatic election years in recent memory.
“Although early events suggested a clear picture of the outcome for the US President and Congress, recent events have also cast doubt on the outcome,” JPMorgan analysts wrote.
Chris Marangi, chief investment officer of Gabelli Funds, believes the election will add to market volatility. At the same time, expected rate cuts in September could increase turnover in markets that have been dominated by Big Tech for a year, he said.
“We expect more volatility in the election but the current volatility will continue as low prices offset economic weakness,” he said.
