In a week filled with extreme market volatility, the stock market managed to stage a remarkable rebound in the final stretch, resulting in its biggest back-to-back advance in 2024. This turnaround came after a series of ups and downs that had rattled the global financial world, including a bout of panic selling on Monday. The S&P 500, which had nearly wiped out its losses for the week, rose by 0.5%, signaling a semblance of calm after a tumultuous period.
August has been a month filled with drama for the market, with concerns about the Federal Reserve’s response to weak economic data and conflicting views on Japan’s policy path adding to the uncertainty. The impact of the yen carry trade has reverberated across asset classes, further exacerbating the market convulsions. Liz Young Thomas at SoFi noted, „Even if that nerve-racking event is over, we learned how sensitive markets now are to cooler US economic data, how broad-reaching the impact of the yen carry trade can be, and how conditioned investors are to expect rate cuts as the salve for every scrape.“
Despite the recent market turmoil, some analysts view the selloff as excessive, with Ronald Temple at Lazard pointing out that the market had appreciated significantly, reaching extended valuations. He sees the indiscriminate drawdowns as potential opportunities for investors, provided that the fundamentals have not materially changed. This sentiment was echoed by John Stoltzfus at Oppenheimer Asset Management, who remains bullish on stocks, citing solid US economic fundamentals and the potential for a reduction in tight monetary policy.
The market’s fear gauge, the VIX, which had spiked above 65 on Monday, signaling extreme panic, subsided to around 20 by the end of the week. Nicholas Colas at DataTrek Research emphasized the importance of interpreting volatile market conditions, noting that while the current environment is uncomfortable, it does not necessarily signal a robust recession or the end of the bull market. Lawrence Summers, former Treasury Secretary, called for a closer examination of the VIX surge, suggesting that liquidity issues may have contributed to the artificial move.
As market sentiment sank to historic lows early in the week, the stock-bond ratio, a measure of market sentiment, also reached a point that historically preceded excellent returns. Dean Christians at SentimenTrader highlighted that similar periods of panic-driven fear in the past had often been followed by strong market rallies. Michael Hartnett at Bank of America Corp. noted that while investor feedback may be „frazzled,“ expectations of Fed rate cuts have kept the preference for stocks over bonds intact.
Looking ahead, Mark Luschini at Janney Montgomery Scott anticipates subsiding market volatility in the absence of major economic news until the next Wednesday’s consumer price index release. However, he cautioned that August and September are seasonally weak for equities, and volatility may persist, especially in the midst of a contested presidential election.
Overall, despite the recent market turbulence, analysts remain cautiously optimistic about the market’s prospects, citing solid economic fundamentals and the potential for policy adjustments to support continued growth. The recent rebound in stocks, coupled with a decline in market volatility, offers a glimmer of hope for investors navigating through uncertain times in the financial markets.