A week of ups and downs for the U.S. stock market leaves investors ready for the volatility ahead | WTAQ News Talk

By David Randall

NEW YORK (Reuters) – A week of wild market volatility has investors eyeing inflation data, corporate earnings and presidential polls for signals that could ease the recent turbulence in the U.S. stock market.

After months of quiet trading, U.S. stock volatility has spiked this month as a series of alarming data points coincided with the end of a massive, yen-fueled carry trade that sparked the worst stock selloff this year. The S&P 500 is still down about 6% from a record high reached last month, even after recouping losses in a series of rallies following Monday’s crushing selloff.

The trajectory of the U.S. economy is a sticking point for many investors. After months of betting on a soft economic landing, investors rushed to price in the risk of a bigger decline after weaker-than-expected output and employment data last week.

“Everybody is worried about the economy right now,” said Bob Kalman, a portfolio manager at Miramar Capital. “We’re moving away from the greed part of the program, and now the market is facing fear of significant geopolitical risks, a hotly contested election and volatility that won’t go away.”

While stocks have rallied in recent days, investors believe it will take some time for calm to return to markets. Indeed, the historical performance of the Cboe Volatility Index — which posted its largest one-day gain ever on Monday — shows that volatility spikes typically take months to dissipate.

Known as Wall Street’s fear gauge, the index measures demand for options protection from market volatility. Once it closes above 35 — a high it reached on Monday — it takes an average of 170 sessions to return to 17.6, its long-term median and a level associated with much less extreme investor anxiety, a Reuters analysis found.

One potential flashpoint will be the release of U.S. consumer price data on Wednesday. Signs that inflation is falling too quickly could fuel concerns that the Federal Reserve has stunned the economy by keeping interest rates too high for too long, contributing to market turbulence.

Futures markets are now pricing in a 55% probability that the central bank will cut rates by 50 basis points in September at its next monetary policy meeting, down from around 5% a month ago.

“Slower wage growth confirms that U.S. economic risks are becoming more two-sided as inflation eases and economic activity slows,” Oscar Munoz, chief U.S. macro strategist at TD Securities, said in a recent note.

Meanwhile, corporate earnings were neither high enough nor weak enough to indicate the market’s direction, said Charles Lemonides, head of hedge fund ValueWorks LLC.

Overall, S&P 500 companies reported second-quarter earnings that were 4.1% above expectations, in line with the long-term average of 4.2% above expectations, according to LSEG data.

Walmart and Home Depot are among the companies set to report earnings next week, with results expected to provide a snapshot of how U.S. consumers are coping after months of high interest rates.

The end of the month brings gains for chip giant Nvidia, whose shares are up about 110% this year, even after a recent sell-off. The Federal Reserve’s annual meeting in Jackson Hole, scheduled for Aug. 22-24, will give policymakers another chance to fine-tune their monetary policy message ahead of the September meeting.

Lemonides believes the recent volatility represents a healthy correction in an otherwise strong bull market, and has invested in Amazon.com to capitalize on the company’s weakness.

The U.S. presidential race is also likely to increase uncertainty.

Democrat Kamala Harris is leading Republican Donald Trump 42% to 37% in the Nov. 5 presidential race, according to an Ipsos poll released Thursday. Harris, the vice president, entered the race on July 21 when President Joe Biden ended his campaign following a disastrous June 27 debate performance with Trump.

With nearly three months to go before the Nov. 5 vote, investors are bracing for many more twists and turns in an election year that has proven to be one of the most dramatic in recent memory.

“While early events suggested a brighter picture for the U.S. presidential and congressional election results, recent events have once again cast doubt on that outcome,” JPMorgan analysts wrote.

Chris Marangi, co-chief investment officer at Gabelli Funds, said the election will increase market volatility. At the same time, expected rate cuts in September could increase rotation in areas of the market that lagged in a year dominated by Big Tech, he said.

“We expect increased volatility around the election, but the underlying rotation will continue as lower interest rates offset economic weakness,” he said.

(Reporting by David Randall; Additional reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Leslie Adler)