A rebound in stocks in the final stretch of a wild week drove the market to its biggest back-to-back advance in 2024.

That semblance of calm stands in stark contrast to the recent gyrations that rattled the global financial world. After the many ups and downs — including Monday’s panic selling — the S&P 500 nearly wiped out its losses for the week. Almost every major group gained in a session of lackluster trading volume.

There’s been no shortage of drama in August that hit a market showing signs of exhaustion after a big rally. Worries about the Federal Reserve being behind the curve after some weak economic data points left traders on edge. Conflicting views around Japan’s policy path have worsened the convulsions, with the battered carry trade ricocheting across asset classes.

“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,” said Liz Young Thomas at SoFi.

At Lazard, Ronald Temple noted that the severity of the slide was a reminder the market has appreciated materially, reaching valuations that most would agree were extended. Still, the selloff was “excessive and likely represents an opportunity to selectively add equity exposure for long-term investors.”

“For investors who measure performance in years, indiscriminate drawdowns like that seen in the last week can represent great opportunities if the fundamentals have not materially changed,” he said. “In my view, the economic fundamentals remain solid.”

The S&P 500 rose 0.5 per cent, with the advance leaving the gauge little changed for the week. Expedia Group Inc. climbed on better-than-expected results. Cisco Systems Inc. plans to eliminate thousands more jobs in a second round of layoffs this year, Reuters reported.

Treasury 10-year yields fell five basis points to 3.94%. After pricing aggressive Fed cuts this week, traders pared bets to about 100 basis points of easing for the year. Most economists surveyed by Bloomberg see only a quarter-point decrease in September. That’s at odds with calls from some big banks for a jumbo cut.

To John Stoltzfus at Oppenheimer Asset Management, the bull market has room to run.

“We’re still bullish on stocks, he said. “We believe US economic fundamentals remain on solid footing despite the drag of tight monetary policy, which we believe will soon be reduced.”

Wall Street’s “fear gauge” — the VIX — subsided further on Friday, hovering around 20. That’s after an unprecedented spike that took the gauge above 65 on Monday, a rare level normally signaling utter panic. That unusual surge has raised some questions on whether the index was actually “overstating” all that stress in the US stock market.

The old saying that “volatility is the price you pay for equity market returns” is absolutely true, but deciphering what volatile markets say about the future is a valuable exercise nonetheless, according to Nicholas Colas at DataTrek Research.

“Current market conditions are not comfortable, to say the least,” Colas said. “But they are neither flashing a robust recession warning nor condemning the current bull market to a premature end. After a rough week, we take comfort in that message.”

Former Treasury Secretary Lawrence Summers urged the Securities and Exchange Commission and relevant exchanges to look into the historic surge in the most-watched gauge of US financial volatility on Monday.

“My understanding is that because there are some illiquid instruments that go into the calculation of the VIX, the VIX had a somewhat artificial move on Monday,” Summers said on Bloomberg Television’s Wall Street Week with David Westin on Friday. “Since that is so widely watched an indicator, issues of liquidity, issues around how it settles, I think should be studied by the relevant parties in the industry and the regulator — the SEC.”

As broad-based selling gripped equity markets early this week, a sentiment signal sank to one of its lowest points in history. T

The stock-bond ratio — which compares the S&P 500 against a long-dated Treasury to test whether equities are cheap or expensive compared to bonds — also serves as a measure for market sentiment, said Dean Christians at SentimenTrader. 

And similar periods of panic-driven fear in the past were followed by excellent returns. Since 1962, the ratio dipped this far only 13 other times, and in more than 90% of those instances, the S&P 500 rallied a year later.

‘Frazzled’

At Bank of America Corp., Michael Hartnett says the turbulence has yet to reach proportions that would signal worries about a hard economic landing.

“Technical levels that would flip Wall Street’s narrative from soft to hard landing have not been broken,” Hartnett said. “Investor feedback is ‘frazzled’,” but expectations of Fed rate cuts mean that preference for stocks over bonds hasn’t been ended by the market rout, he added.

For now, the absence of any major economic news until next Wednesday’s CPI release will likely lead to subsiding market volatility for now, according to Mark Luschini at Janney Montgomery Scott. 

Still, he notes that August and September are seasonally weak for equities — so volatility might expect to be present, especially in the midst of a contested presidential election.

Some of the main moves in markets:

Stocks

  • The S&P 500 rose 0.5 per cent as of 4 p.m. New York time
  • The Nasdaq 100 rose 0.5 per cent
  • The Dow Jones Industrial Average rose 0.1 per cent
  • The MSCI World Index rose 0.6 per cent

Currencies

  • The Bloomberg Dollar Spot Index fell 0.2 per cent
  • The euro was unchanged at $1.0919
  • The British pound rose 0.1 per cent to $1.2762
  • The Japanese yen rose 0.4 per cent to 146.64 per dollar

Cryptocurrencies

  • Bitcoin rose 1.9 per cent to $60,668.49
  • Ether rose 0.8 per cent to $2,591.07

Bonds

  • The yield on 10-year Treasuries declined five basis points to 3.94 per cent
  • Germany’s 10-year yield declined four basis points to 2.22 per cent
  • Britain’s 10-year yield declined three basis points to 3.94 per cent

Commodities

  • West Texas Intermediate crude rose 1 per cent to $76.98 a barrel
  • Spot gold rose 0.1 per cent to $2,430.32 an ounce

This story was produced with the assistance of Bloomberg Automation.

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