Rollercoaster Week in US Stocks Leaves Investors Prepared for Challenges Ahead

By David Randall

NEW YORK (Reuters) – After a week marked by significant fluctuations in the stock market, investors are keeping a close watch on upcoming inflation data, corporate earnings, and presidential polls for potential signs that could help ease the recent market turbulence.

U.S. stock volatility has surged this month, disrupting a previously calm trading environment. This spike in turbulence coincided with concerning economic data and the unwinding of a substantial yen-fueled carry trade, leading to the worst selloff of the year. Currently, the market remains roughly 6% lower than the record high achieved last month, despite some recovery following the steep decline earlier in the week.

A key concern for many investors is the direction of the U.S. economy. After months of optimism regarding a smooth economic transition, many are now adjusting their outlooks in light of disappointing manufacturing and employment reports from last week.

"Everyone is now worried about the economy," stated Bob Kalman, portfolio manager at Miramar Capital. He noted a shift from an atmosphere of greed to one dominated by fear due to significant geopolitical risks and the ongoing election cycle, amid persistent market volatility.

While recent stock rallies have provided some hope, traders believe that it may take time for stability to return to the markets. Historically, surges in volatility, as indicated by the Cboe Volatility Index—which recently experienced its largest single-day increase—typically require several months to normalize.

The Volatility Index, often referred to as Wall Street’s fear gauge, reflects the demand for options that offer protection against market fluctuations. When this index closes above 35, it often signifies heightened investor anxiety, with the average time taken to return to a calmer level being around 170 trading sessions.

The release of consumer price data on Wednesday could act as a critical catalyst. A significant drop in inflation might intensify concerns that the Federal Reserve’s prolonged high-interest rate environment has pushed the economy toward a downturn, further affecting market conditions.

Currently, futures markets indicate a 55% likelihood that the Federal Reserve will reduce benchmark interest rates by 50 basis points at its next policy meeting, a sharp increase from the roughly 5% expectation a month ago.

"Slower payroll growth suggests that the risks to the U.S. economy are becoming more balanced, as inflation decreases alongside a slowdown in economic activity," noted Oscar Munoz, chief U.S. macro strategist at TD Securities.

Meanwhile, corporate earnings have been somewhat mixed, lacking the strength or weakness needed to provide clear market direction, according to Charles Lemonides, head of ValueWorks LLC. Companies within the S&P 500 have reported second-quarter earnings that exceed expectations by 4.1%, which aligns closely with the long-term average.

Key companies such as Walmart and Home Depot are set to release their earnings next week, with their performance expected to provide insights into consumer resilience after sustained high-interest rates. The end of the month will also bring earnings reports from Nvidia, a major player in the tech sector, whose shares have risen by approximately 110% this year, despite a recent downturn. The Federal Reserve’s annual gathering in Jackson Hole later this month will also be closely watched for clues about future monetary policy.

Lemonides views the recent volatility as a necessary correction within an otherwise robust bull market and has taken advantage of this by investing in Amazon.

The upcoming U.S. presidential race is another factor likely to heighten uncertainty in the markets. Current polling shows Democrat Kamala Harris leading Republican Donald Trump 42% to 37% ahead of the November 5 election. Recent developments suggest that the political landscape continues to evolve dramatically as the election approaches.

"As we move closer to the election, the landscape may change again, contributing to increased volatility," analysts from JPMorgan commented.

Chris Marangi, co-chief investment officer of Gabelli Funds, expects that the election will introduce additional market fluctuations. He also indicated that anticipated interest rate cuts could prompt a shift toward sectors that have underperformed, despite the current focus on large technology companies.

"Increased volatility is expected leading up to the election, but the underlying market rotation may persist as lower rates counterbalance economic challenges," he concluded.