After months of quiet trading, US stock volatility rose this month as a run of worrisome data triggered a massive, yen-fueled carry trade as equities faced their worst selloff of the year. Even after making ground in a series of rallies after Monday’s crushing selloff, the S&P 500 is about 6% below the record high set last month.
The issue for many investors is the way the US economy is headed. After months of betting on an economic soft landing, investors last week rushed to price in the risk of a more severe slowdown following weaker-than-expected manufacturing and employment data.
“Everybody’s worried about the economy right now,” said Bob Kalman, portfolio manager at Miramar Capital. “We are moving away from the greed part of the program and now the market faces significant geopolitical risks, a hotly contested election and volatility fears that are not going away.”
Although stocks have seen a rally in recent days, traders believe that it will take some time before the markets return to calm. Indeed, the historical behavior of the Cboe Volatility Index — which saw its biggest one-day jump on Monday — shows that volatility spikes typically take months to dissipate.
Known as Wall Street’s fear gauge, the index measures the demand for options to protect against market swings. While it closed above 35 – an elevated level that it peaked on Monday – the index took an average of 170 sessions to return to 17.6, its long-term median and a level associated with very little extreme investor concern, a Reuters analysis showed. .
The US A potential flashpoint will be when consumer price data is reported on Wednesday. Signs that inflation is falling too fast could fuel fears that the Federal Reserve has sent the economy into a tailspin by keeping interest rates high for too long, contributing to market turmoil.
For now, futures markets are pricing in a 55% chance that the central bank will cut benchmark interest rates by 50 basis points at its next policy meeting in September, compared with about a 5% chance a month ago.
“Slow payroll growth reinforces that US economic risks are becoming more bilateral as inflation cools and activity slows,” Oscar Munoz, chief US macro strategist at TD Securities, said in a recent note.
Corporate earnings, meanwhile, are neither strong nor weak enough to direct the market, said Charles Lemonides, head of hedge fund ValueWorks LLC.
Overall, companies in the S&P 500 reported second-quarter results that beat expectations by 4.1%, according to LSEG data, in line with the long-term average of 4.2%.
Walmart and Home Depot are among the companies reporting earnings next week, with their results offering a snapshot of how U.S. consumers are holding up after months of rising interest rates.
The end of the month brings earnings from chip giant Nvidia, whose shares are up nearly 110% this year even after a recent selloff. The Fed’s annual Jackson Hole gathering, set for Aug. 22-24, will give policymakers another chance to fine-tune their monetary policy message before their September meeting.
Lemonides believes the recent volatility is a healthy correction during an otherwise strong bull market, and has opened a position in Amazon.com to take advantage of its weakness.
Uncertainty is also likely to increase in the US presidential race.
Democrat Kamala Harris leads Republican Donald Trump 42% to 37% in the race for the Nov. 5 presidential election, according to an Ipsos poll released Thursday. Harris, the vice president, entered the race on July 21 when President Joe Biden folded his campaign following a disastrous debate performance against Trump on June 27.
With nearly three months to go until the Nov. 5 polls, investors are bracing for plenty of additional twists and turns in an election year that is already one of the most dramatic in recent memory.
“While early events suggested a clear picture of the US presidential and congressional results, more recent events have again thrown the outcome into doubt,” JP Morgan analysts wrote.
Chris Marangi, co-chief investment officer at Gabelli Funds, believes the election will add to market volatility. At the same time, an expected rate cut in September could boost turnover in areas of the market that are lagging behind in a year dominated by big tech, he said.
“We expect increased volatility in the election but the underlying circulation will continue as lower rates offset economic weakness,” he said.
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