Wall Street: A week of ups and downs for US stocks, investors prepare for difficulties to come

New York –

A week of wild market swings has investors looking to inflation data, corporate profits and presidential polls for signals that might calm a recent wave of turbulence in U.S. stocks.

After months of quiet trading, volatility in U.S. stocks has surged this month as a series of alarming data coincided with the end of a massive yen-fueled carry trade that sent stocks into their worst slump of the year. The S&P 500 index .SPX is still down about 6% from last month’s record high, even after making up some ground in a series of rebounds after Monday’s sharp drop.

The trajectory of the U.S. economy is top of mind for many investors. After months of betting on a soft landing for the economy, investors rushed to price in the risk of a deeper slowdown after weaker-than-expected manufacturing and employment data were released last week.

“Everyone is now worried about the economy,” said Bob Kalman, portfolio manager at Miramar Capital. “We’re moving away from the greed part of the agenda and the market is now facing fears of significant geopolitical risks, a hotly contested election and volatility that isn’t going to go away.”

Although stocks have rallied in recent days, traders say it will take some time for markets to calm down. Indeed, the historical behavior of the Cboe Volatility Index .VIX — which posted its biggest one-day gain on Monday — shows that bursts of volatility typically take months to dissipate.

Known as Wall Street’s fear gauge, the index measures demand for options that protect against market swings. When it closes above 35 — a high it surpassed on Monday — it takes an average of 170 sessions for the index to return to 17.6, its long-term median and a level associated with much less extreme investor anxiety, according to a Reuters analysis.

One potential flashpoint will be Wednesday’s release of U.S. consumer prices. Signs that inflation has fallen too far could reinforce concerns that the Federal Reserve has sent the economy into a downward spiral by leaving interest rates high for too long, contributing to market turmoil.

Futures markets are currently pricing in a 55% chance that the central bank will cut benchmark interest rates by 50 basis points in September at its next policy meeting, compared with a probability of around 5% a month ago.

“The slowdown in wage growth reinforces the view that U.S. economic risks are becoming increasingly bilateral as inflation moderates and activity slows,” Oscar Munoz, chief U.S. macro strategist at TD Securities, said in a recent note.

Corporate earnings, meanwhile, have been neither strong nor weak enough to give the market direction, said Charles Lemonides, principal at hedge fund ValueWorks LLC.

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

Walmart WMT.N and Home Depot HD.N are among the companies reporting results next week, with their results seen as offering a glimpse of how U.S. consumers are holding up after months of high interest rates.

The end of the month will see the release of results from chip giant Nvidia, whose shares are up about 110% this year, even after a recent slide. The Fed’s annual meeting in Jackson Hole, scheduled for Aug. 22-24, will give Fed officials another chance to refine their monetary policy message ahead of their September meeting.

Lemonides believes the recent volatility is a healthy correction in an otherwise strong bull market, and he initiated a position in Amazon.com AMZN.O to take advantage of its weakness.

The US presidential race is also likely to increase uncertainty.

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

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

“While early events suggested a clearer picture of the U.S. presidential and congressional election results, more recent events have again cast doubt on those outcomes,” JPMorgan analysts wrote.

Chris Marangi, co-head of value investing at Gabelli Funds, said the election will add to market volatility. At the same time, rate cuts expected in September could spur a rotation into areas of the market that have lagged in a year dominated by big tech, he said.

“We expect increased volatility heading into the election, but the underlying rotation should continue as lower rates offset economic weakness,” he said.