The stock market witnessed a rollercoaster ride this week, marked by dramatic sell-offs and a remarkable recovery that has investors cautiously optimistic. The major indices closed higher on Friday, edging close to erasing the steep losses from earlier in the week. This article delves into the factors driving this volatility, the key performances of the S&P 500, Nasdaq, and Dow Jones, and the broader economic indicators that shaped the market's trajectory.
Major Indexes ride the rollercoaster
The S&P 500 ended last week with a slight decline of 0.04%, closing this past Friday at 5,344.16 after gaining 0.47%. This recovery comes on the heels of a sharp sell-off on Monday, where the index dropped nearly 3%, its worst day since 2022. The volatility stemmed from a mix of disappointing U.S. payroll data and concerns about the Federal Reserve's delayed response to rising economic pressures.
The Nasdaq Composite mirrored the S&P 500's recovery, closing last week at 16,745.30, up 0.51% on Friday. Despite this, the index posted a 0.18% weekly decline. The tech-heavy index's performance was particularly volatile, dipping into correction territory earlier in the week with a 10% drop from its recent highs.
The Dow Jones Industrial Average added 51 points this past Friday, closing at 39,497.54, marking a 0.13% increase for the day. However, the index fell 0.6% for the week, reflecting a more subdued recovery compared to its counterparts.
Monday's Sell-Off: What Triggered the Market Plunge?
Last week kicked off with a sharp decline across major indices, driven by underwhelming U.S. payroll data that sparked fears of a slowing economy. This was compounded by concerns that the Federal Reserve's recent interest rate cuts might have been too little, too late. The S&P 500's 3% drop and the Dow's 1,000-point plunge marked the most volatile day of 2024.
Adding to the market's woes was the unwinding of a popular currency trade by hedge funds, which had long bet on the Japanese yen. As these positions were reversed, it led to significant sell-offs, further exacerbating the market's decline.
A Mid-Week Turnaround: Key Drivers of the Recovery
The market began its recovery on Thursday, buoyed by positive jobless claims data. The number of initial jobless claims came in well below expectations at 233,000, offering some relief to investors concerned about the U.S. labor market. This news sparked a 2.3% rally in the S&P 500, its best single-day performance since November 2022.
The bond market also played a crucial role in last week's volatility. The 10-year Treasury yield fell below 3.70% on Monday before rebounding to close the week at 3.94%. Meanwhile, 2-year Treasury yields rose from 3.87% to 4.03%. These movements reflect shifting investor expectations about the Federal Reserve's future rate cuts.
Sector Performances: Winners and Losers
Energy stocks were the standout performers last week, rising 1.6% despite the broader market's turbulence. The sector benefited from rising crude oil prices, which climbed over 4% for the week. Concerns about potential disruptions in the Middle East due to geopolitical tensions further supported oil prices.
Tech stocks had a mixed week, with the Nasdaq Composite posting a small weekly decline. Nvidia, a key player in the sector, saw its shares drop 2.3% for the week, continuing a downward trend that began in August. On the other hand, cybersecurity ETFs gained over 1% on Friday, with Japan-based Trend Micro and Akamai leading the charge.
Industrials and financials were the only other sectors to close the week in positive territory, rising 1% and 0.5%, respectively. These gains were driven by strong earnings reports from key companies and a general sense of optimism about the U.S. economy's resilience.
Last week's Economic Reports: A Mixed Bag
Last Monday's economic data provided mixed signals. The ISM Non-Manufacturing Index came in at 51.4%, slightly above the expected 50.0%, indicating moderate growth in the services sector. The S&P Global US Services PMI, however, fell to 55.0 from 56.0 in June, still within expansion territory but showing signs of slowing momentum.
The Atlanta Fed's GDPNow forecast for Q2 was revised up to 2.9% from 2.8%, reflecting a modestly improved outlook for the U.S. economy. This revision helped to ease some of the market's concerns about a potential recession, contributing to the late-week rally last week.
Investor Sentiment and Market Outlook
Jay Hatfield, CEO of Infrastructure Capital Advisors, attributed much of last week's volatility to hedge funds rather than long-term investors. He noted that the recent market moves, while dramatic, do not necessarily signal a change in the long-term outlook. Hatfield emphasized that such volatility is typical for late summer when trading volumes are lower, and earnings season is winding down.
Market Expectations for Fed Rate Cuts
Market expectations for future rate cuts by the Federal Reserve have shifted slightly this week. The probability of a 50 basis point cut in September has dropped to 60% from 76% last week. Current forecasts suggest that the Fed may implement 100-125 basis points of cuts by the December FOMC meeting, reflecting a more cautious approach.
Looking Ahead: What to Expect Next Week
As earnings season draws to a close, a few big names like Home Depot, Walmart, and Cisco Systems are still set to report next week. These reports will be closely watched for insights into consumer spending and business investment trends, both of which are critical for sustaining the economic recovery. Investors will also need to keep an eye on geopolitical developments, particularly in the Middle East, where tensions could impact global oil supply and prices. Any significant escalation could add to market volatility in the coming weeks.
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