(Bloomberg) — A rebound in stock prices at the end of a wild week gave the market its biggest consecutive rise in 2024.
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This appearance of calm stands in stark contrast to the recent turmoil that has rocked the global financial world. After many ups and downs – including Monday’s panic selling – the S&P 500 has almost recovered its losses for the week.
August saw plenty of drama in a market that was showing signs of exhaustion. Concerns that the Federal Reserve might lag behind after some weak economic data made traders nervous. Conflicting views on Japan’s policy stance exacerbated the shocks, and the battered carry trade vacillated across asset classes.
“Even though this nerve-wracking event is over, we have learned how sensitive markets have become to cooler U.S. economic data, how far-reaching the impact of the yen carry trade can be, and how conditioned investors are to expect rate cuts as a panacea for every predicament,” said SoFi’s Liz Young Thomas.
Ronald Temple of Lazard noted that the severity of the slide was an indication that the market had gained significantly in value and reached valuations that most would consider stretched, but he still believes the sell-off is “overdone.”
“For investors who measure performance in years, random price declines like last week can represent great opportunities when fundamentals have not changed significantly,” he said.
The S&P 500 rose 0.5% but closed lower for a fourth consecutive week – the longest losing streak since September 2023. Expedia Group Inc. climbed on better-than-expected results. Cisco Systems Inc. plans to cut thousands more jobs in a second round of layoffs this year, Reuters reported.
Yields on 10-year U.S. Treasury notes fell five basis points to 3.94 percent. After pricing in aggressive Fed rate cuts this week, traders reduced their bets on about 100 basis points of easing for the year. Most economists surveyed by Bloomberg expect only a quarter-point decline in September, contradicting calls for a rate cut by some major banks.
For John Stoltzfus of Oppenheimer Asset Management, there is still room for the bull market to grow.
“We remain optimistic on equities,” he said. “US economic fundamentals remain solid despite the drag from tight monetary policy, which we believe will soon ease.”
Wall Street’s “fear indicator” – the VIX – continued to fall on Friday, hovering around 20. This came after the index made an unprecedented spike above 65 on Monday, a rare reading that usually signals extreme panic. This unusual spike has raised some questions about whether the index has “overplayed” all the stress in the US stock market.
The old saying “volatility is the price you pay for stock market returns” is absolutely true, but deciphering what volatile markets say about the future is still a valuable exercise, according to Nicholas Colas of DataTrek Research.
“Current market conditions are not pleasant, to say the least,” Colas said. “But they are neither a clear warning sign of a recession nor do they condemn the current bull market to a premature end. After a rough week, we take comfort in this message.”
Former US Treasury Secretary Lawrence Summers on Monday called on the US Securities and Exchange Commission (SEC) and the relevant stock exchanges to take a closer look at the historic rise in the most closely watched indicator of volatility in the US financial markets.
“My understanding is that the VIX on Monday was somewhat artificial because of the inclusion of some illiquid instruments in the calculation of the VIX,” Summers said Friday on Bloomberg Television’s Wall Street Week with David Westin. “Because this indicator is so closely watched, I think the relevant parties in the industry and the regulator – the SEC – should be looking at liquidity and settlement issues.”
As broad-based selling hit equity markets earlier this week, a sentiment indicator sank to one of its lowest levels in history.
The stock-to-bond ratio – which compares the S&P 500 to a long-term Treasury bond to test whether stocks are cheap or expensive relative to bonds – also serves as a measure of market sentiment, said Dean Christians of SentimenTrader.
And similar panic-induced periods of fear in the past have been followed by excellent returns. Since 1962, the ratio has only fallen that far 13 times, and in more than 90 percent of those cases, the S&P 500 recovered a year later.
‘Frayed’
Michael Hartnett of Bank of America Corp. said the turbulence has not yet reached a level that would raise concerns about a hard economic landing.
“Technical levels that would have turned Wall Street from a soft landing to a hard landing have not been breached,” Hartnett said. “Investor feedback is ‘drained,'” but expectations of Fed rate cuts meant the preference for stocks over bonds had not been ended by the market collapse, he added.
The lack of major economic news until the release of the consumer price index next Wednesday will likely lead to declining market volatility for the time being, according to Mark Luschini of Janney Montgomery Scott.
However, he points out that equity markets are seasonally weak in August and September, so volatility is to be expected, especially amid a contested presidential election.
Some of the key market movements:
Shares
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The S&P 500 rose 0.5% at 4 p.m. New York time
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The Nasdaq 100 rose 0.5%
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The Dow Jones Industrial Average rose 0.1%
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The MSCI World Index rose by 0.6 percent
Currencies
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The Bloomberg Dollar Spot Index fell 0.2 percent
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The euro remained unchanged at 1.0919 dollars
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The British pound rose 0.1% to $1.2762.
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The Japanese yen rose 0.4% to 146.64 per dollar
Cryptocurrencies
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Bitcoin rose 1.9% to $60,668.49
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Ether rose 0.8% to $2,591.07
Bonds
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The yield on 10-year government bonds fell five basis points to 3.94%.
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The yield on German 10-year bonds fell by four basis points to 2.22 percent
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The yield on British 10-year bonds fell by three basis points to 3.94 percent
Raw materials
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West Texas Intermediate crude oil rose 1% to $76.98 a barrel
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The spot price of gold rose 0.1 percent to $2,430.32 per ounce.
This story was created with the assistance of Bloomberg Automation.
– With support from Robert Brand, Chiranjivi Chakraborty and Richard Henderson.
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