Stock Market’s Steep Fall and Quick Recovery Leaves Investors Puzzled
In a surprising turn of events, the stock market experienced a steep one-day fall followed by a rapid recovery, leaving investors perplexed about the true driving force behind the ongoing bull market. The S&P 500 and Dow industrials have reached multiple record highs in 2024, but the recent volatility has raised questions about the sustainability of this upward trend.
The catalyst for the market’s initial decline was Tuesday’s January consumer-price index, which came in hotter than expected. This unexpected inflationary pressure forced investors to reassess their expectations for potential rate cuts by the Federal Reserve. Speculation arose that as many as six quarter-point rate cuts could be implemented starting in March or May.
However, stocks managed to claw back most, if not all, of the losses incurred on Tuesday. The S&P 500 ended Thursday at its 11th record close of 2024, indicating that the delay in rate cuts was not as catastrophic as initially feared. Tim Hayes, chief global investment strategist at Ned Davis Research, emphasized that doubts about the timing of bullish events should be distinguished from fears of bearish scenarios such as resurgent inflation or collapsing economic growth.
The Dow Jones Industrial Average (DJIA) suffered a 1.4% drop on Tuesday, its worst day since March of the previous year. Similarly, the S&P 500 and Nasdaq Composite also experienced losses of 1.4% and 1.8%, respectively. However, the market rebounded over the next two days, with Thursday’s gains partly attributed to a weaker-than-expected January retail sales report. This report alleviated concerns that a surging economy would trigger a new wave of inflation.
Unfortunately, Friday brought another inflation reading from the January producer-price index, which exceeded expectations. As a result, stocks pulled back slightly, ending a five-week streak of consecutive gains for the S&P 500. The Dow also experienced a minor decline of 0.1% for the week.
The market’s knee-jerk reactions to data that deviates from expectations are not uncommon. Chris Zaccarelli, chief investment officer at the Independent Investor Alliance, believes that it may take a few more data releases to determine whether this week’s events were merely a temporary setback or the start of a new trend. Zaccarelli maintains that as long as the economy continues to expand without slipping into a recession, the bull market will persist.
The recovery in stocks and the subsequent drop in the Cboe Volatility Index (VIX), often referred to as Wall Street’s “fear gauge,” shed light on the situation. NDR’s Tim Hayes noted that if equities had been driven lower by rising fear, the recovery and quick drop in the VIX would not have occurred. However, concerns remain among some market watchers regarding bets on declining volatility through the options market. The sudden surge in the VIX was partly blamed for Tuesday’s stock selloff, and analysts caution that further disruptions could be on the horizon.
Traders who were hoping for a sustained pullback in the market expressed frustration with these one-day wonders. Mark Arbeter, president of Arbeter Investments, highlighted the three significant declines in less than two months, with the first occurring on December 20 and the second on January 31. Despite these setbacks, the major indexes have remained in uptrends since their October 27 lows.
Arbeter acknowledged that the market appears due for more downside technically, but he emphasized that the current support levels should not be overlooked. The S&P 500’s 21-day exponential moving average serves as an important level of support on the chart. If this level is breached, minor support and the 50-day simple moving average stand at 4,800. A drop below 4,800 would open the door for a potential decline to 4,600, which represents strong chart support.
As the stock market continues to navigate through uncertain waters, investors are left grappling with the enigma of its steep falls and quick recoveries. The underlying factors driving this volatility remain elusive, and only time will reveal whether this week’s events were mere bumps in the road or indicative of a larger shift in the market’s trajectory.