Wall Street ended trading mixed on Monday as market participants prepared for important economic data to be released this week. Investors are particularly focused on the upcoming U.S. consumer price data, which will determine the future course of the Federal Reserve's monetary policy.
The Dow Jones Industrial Average lost ground, while the benchmark S&P 500 and tech-heavy Nasdaq Composite ended modestly higher. Meanwhile, the Russell 2000 index of smaller companies fell 0.9%.
"The recent trend of investors to switch to smaller companies like the Russell 2000, cyclicals and financials has already begun to wane," said James Abate, chief investment officer at Centre Asset Management in New York. He said current economic conditions are not conducive to sustained earnings and stock price growth.
Investors are looking ahead to the U.S. consumer price index (CPI) this week, due on Wednesday. The data is expected to show inflation accelerating 0.2% in July from June, with the annual inflation rate remaining at 3%.
Market participants are also focused on reports from major retailers, which will help gauge current consumer demand.
The consensus in the money market is that the Fed could cut interest rates by 25 or 50 basis points as early as September. According to CME's FedWatch tool, a total monetary easing of 100 basis points is expected by the end of 2024.
Investors will be focused on the US retail sales report for July on Thursday. While expectations point to a modest increase, any weakness in the data could reignite concerns about slowing consumer demand and even the possibility of a recession.
Big retailers like Walmart and Home Depot are also set to report earnings in the coming days. The results will be closely watched by analysts and investors as they provide an important indicator of the health of the consumer market amid rising unemployment.
James Abate, chief investment officer at Centre Asset Management, warns that a surprise rise in inflation that exceeds expectations could seriously disappoint the market. He says retail earnings are especially important now given recent signs of labor market trouble.
The trading session ended mixed, with the S&P 500 up 0.23 points to 5,344.39 and the Nasdaq Composite up 35.31 points, or 0.21%, to 16,780.61. Meanwhile, the Dow Jones Industrial Average fell 140.53 points, or 0.36%, to close at 39,357.01.
Starbucks shares soared 2.58% after reports that activist investor Starboard Value, which holds a stake in the company, is pushing for measures aimed at boosting the coffee giant's stock.
KeyCorp also posted a strong gain of 9.1% after Canadian bank Scotiabank announced it had acquired a minority stake in the U.S. regional lender for $2.8 billion.
Meanwhile, Hawaiian Electric shares plunged 14.45% as the utility expressed concerns about its ability to continue operating amid mounting financial difficulties.
Trading on the New York Stock Exchange (NYSE) and Nasdaq ended with decliners dominating. On the NYSE, the ratio of decliners to gainers was 1.46 to 1, while on the Nasdaq, the ratio was even higher at 1.54 to 1.
The S&P 500 posted 10 new 52-week highs and 7 new lows, while the Nasdaq Composite posted 51 new highs and 179 new lows. These figures show that despite the overall decline, there are still some growth points in the market.
While volatility in the markets has eased significantly since last week, when U.S. stocks suffered a sharp decline, nervousness among investors may persist for some time. The panic flare-up appears to have died down, but history shows that markets can remain under pressure for months.
The Cboe Volatility Index, commonly known as the VIX and often referred to as the "fear index," has stabilized near 20 after hitting a four-year high last week. That's down from its recent peak of 38.57 on August 5. The rapid decline in the VIX is a sign that the sharp moves in the market were driven by short-term factors, such as the unwinding of highly leveraged positions, rather than fundamental issues related to the state of the global economy.
Many market participants see the dissipation of fears as further confirmation that the recent collapse was driven by technicals, including the unwinding of leveraged positions and carry trades financed by the Japanese yen. Investors are confident that these factors are temporary and do not point to deeper structural problems in the global economy.
Despite the recent decline in the VIX volatility index, history shows that markets can remain in a state of heightened anxiety for months after a sharp decline. Episodes where the VIX has risen above 35 are usually followed by a prolonged period of investor caution, which dampens the risk-taking that had previously fueled asset prices.
According to experts, after the VIX reaches a level above 35, which is often associated with a high degree of anxiety among market participants, it takes about 170 trading sessions on average for the index to return to its long-term median of 17.6. This highlights that even after an initial calm, markets can remain volatile for a long time.
J.J. Kinahan, CEO of IG North America and president of online broker Tastytrade, said: "Once the VIX stabilizes in a range, investors begin to feel more relaxed again. However, shocks like the current one usually linger in the memory for six to nine months, maintaining a heightened sense of caution."
The recent turmoil in the U.S. stock market has come after a long period of stability and growth. The S&P 500 has risen 19% for the year, hitting a record high in early July. However, the rally has proven to be unsustainable: poor earnings reports from several major tech companies in July triggered a massive sell-off, sending the VIX rising from the low end of the tens of points to higher levels.
The crisis deepened in late July and early August when the BOJ unexpectedly raised interest rates by 25 basis points. The move hurt carry traders who had borrowed cheaply in Japanese yen to invest in high-yielding assets such as U.S. tech stocks and Bitcoin.
Mandy Xu, head of derivatives research at Cboe Global Markets, said the sharp market decline followed by an equally rapid rebound suggests that the current gyrations are largely due to position unwinding and risk shifting among market participants.
Mandy Xu, head of derivatives research at Cboe Global Markets, stressed that recent spikes in volatility, such as the one seen on August 5, have been concentrated in equities and FX. She noted that other asset classes, such as interest rates and credit, have not seen a significant increase in volatility, suggesting that the current swings are limited.
With uncertainty still looming, investors have every reason to be nervous in the coming months. The biggest worry remains economic data due out of the US. The consumer price report due out later this week will be a key indicator of whether the economy is facing a short-term slowdown or heading for a more serious slowdown.
Political uncertainty is also adding fuel to the fire. With the US elections in November and tensions rising in the Middle East, investors remain on edge as they watch for developments that could significantly impact the market.
Investors will be focused on the CPI data due out on August 14. In addition, earnings reports from giants like Walmart and other major retailers this week could be key to shaping market sentiment. Mark Hackett, head of investment research at Nationwide, said these data could have a decisive impact on investor behavior.
"It is not surprising that in light of recent events, investors may overreact to inflation data, retail earnings and retail sales," Hackett said. In the current emotional environment, any deviations from expectations could cause significant volatility.
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