By David Randall
NEW YORK (Reuters) – A week of wild market volatility has investors awaiting inflation data, corporate earnings and presidential polls for signs that may ease recent turmoil in U.S. stocks.
After months of quiet trading, volatility in U.S. stocks has spiked this month as a series of worrying data coincided with the end of a massive yen-backed trade, sparking the worst equity selloff this year. The U.S. dollar is still down about 6% from a record high hit last month, even after recouping some losses in a series of gains after Monday’s selloff.
The issue that matters to many investors is the trajectory of the U.S. economy. After months of betting on a soft landing, investors have been quick to assess the risk of a sharper slowdown following weaker-than-expected manufacturing and employment data last week.
“Now everyone is worried about the economy,” said Bob Kalman, portfolio manager at Miramar Capital. “We’re moving away from the greed part of the program and now the market is facing concerns about significant geopolitical risk, a hotly contested election and volatility that’s not going away.”
Despite the recent rally in stock prices, traders believe it will be some time before calm returns to the markets. Indeed, the historical behavior of the Chicago Board of Trade’s Volatility Index — which saw its biggest one-day jump ever on Monday — shows that volatility typically takes months to dissipate.
The index, known as Wall Street’s fear gauge, measures demand for options to hedge against market volatility. When it closes above 35 — the high it hit on Monday — it takes the index an average of 170 sessions to return to 17.6, its long-term average and a level associated with less investor anxiety, a Reuters analysis showed.
A potential flashpoint could come when the U.S. releases consumer price data on Wednesday. Signs of sharply lower inflation could heighten concerns that the Federal Reserve has pushed the economy into recession by leaving interest rates high for too long, contributing to market turmoil.
Futures markets are currently pricing in a 55% chance that the central bank will cut its benchmark interest rate by 50 basis points in September, at its next monetary policy meeting, compared with a chance of about 5% a month ago.
“The slowdown in payroll growth confirms that U.S. economic risks have become more dual-sided with inflation and activity slowing,” Oscar Munoz, chief U.S. macro strategist at TD Securities, said in a recent note.
At the same time, corporate earnings have not been strong or weak enough to determine where the market is headed, said Charles Lemonides, president of hedge fund ValueWorks.
Overall, S&P 500 companies reported second-quarter results that came in 4.1% above expectations, in line with the long-term average of 4.2% above expectations, according to LSEG data.
Walmart (NYSE:) and Home Depot Store Apple Inc (NYSE:) will be among the companies reporting earnings next week, with its results seen as providing a snapshot of how U.S. consumers are holding up after months of higher interest rates.
The end of the month sees the announcement from chip giant Nvidia (NASDAQ: NVIDIA), whose shares have risen about 110% this year even after a recent sell-off. The Fed’s annual Jackson Hole meeting, which runs from Aug. 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 has started buying Amazon.com (NASDAQ:) stock to take advantage of its weakness.
The US presidential race is also likely to exacerbate uncertainty.
Democrat Kamala Harris leads Republican Donald Trump 42% to 37% in the race for the Nov. 5 presidential election, an Ipsos poll released Thursday showed. Harris, the vice president, entered the race on July 21 when President Joe Biden dropped out of the campaign after a disastrous debate performance against Trump on June 27.
With nearly three months to go until the Nov. 5 vote, investors are bracing for many more twists and turns in an election year that has already been one of the most dramatic in recent memory.
“While early events pointed to a clearer picture of the outcome of the US presidential and congressional elections, more recent events have once again cast doubt on the outcome,” JPMorgan analysts wrote.
Chris Marangi, co-head of value investing at Gabelli Funds, believes the election will add to market volatility. At the same time, he said, the expected interest rate cuts in September could boost rotation in areas of the market that have lagged in a year dominated by big tech companies.
“We expect increased volatility ahead of the election but the fundamental rotation will continue as low interest rates offset economic weakness,” he said.
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