For at least the third time since late December, the stock market suffered a steep one-day fall only to quickly claim back lost ground, leaving investors to divine what’s really driving a bull market that’s powered the S&P 500 and Dow industrials to multiple record highs in 2024.
Here’s what happened. Tuesday’s January consumer-price index came in hotter than expected, forcing investors to reconsider expectations for as many as six quarter-point rate cuts by the Federal Reserve beginning as early as March or May. Over the next two days, stocks clawed back all or most of the Tuesday losses, with the S&P 500 SPX ending Thursday at its 11th record close of 2024.
Stocks recovered because a mere delay in rate cuts isn’t the catastrophe Tuesday’s knee-jerk reaction implied, Tim Hayes, chief global investment strategist at Ned Davis Research, argued in a note.
“Doubts about the timing of something bullish” — in this case, rate cuts — “should be distinguished from fears about something bearish, such as resurgent inflation or collapsing economic growth,” he wrote.
The Dow DJIA on Tuesday dropped over 500 points, or 1.4%, for its worst day since March of last year, while the S&P 500 also lost 1.4% and the Nasdaq Composite COMP shed 1.8%. The market then enjoyed a two-day bounce, with Thursday’s gains attributed in part to a weaker-than-expected January retail sales report that appeared to soothe fears a surging economy would spark a renewed inflation wave.
Stocks pulled back Friday after another hotter-than-expected inflation reading, this time from the January producer-price index. That left the Dow down 0.1% for the week, while the S&P 500 shed 0.4%, ending a run of five straight weekly gains.
The market’s kneejerk behavior in response to data that runs too hot or too cold makes sense, but it might take a few more data releases to establish either a new trend or to show that this week’s data was a bump in the road, said Chris Zaccarelli, chief investment officer at the Independent Investor Alliance, in emailed comments.
“Our investment thesis for this year never relied on whether the Fed would cut six times or whether they would cut three or fewer times, rather, we believed that an expanding economy that doesn’t fall into recession would perpetuate this bull market and only a recession — or severe growth slowdown — would meaningfully interrupt the rally that began at the end of 2022,” he said.
The bounce in stocks, along with a pullback by the Cboe Volatility Index VIX, a measure of expected S&P 500 volatility over the coming 30-day period, was illuminating, said NDR’s Hayes. The VIX, often referred to as Wall Street’s ”fear gauge,” broke above 15 on Tuesday, ending a streak of 63 sessions below that threshold, but traded at 14.41 Friday afternoon.
“If equities had been driven lower by rising fear, in this case the fear of renewed inflation, then we would not have seen the recovery of the last two days,” Hayes said. ”And we would not have seen the VIX drop back so quickly.”
That said, there are jitters among some market watchers over resurgent bets on declining volatility via the options market. A forced unwinding of those positions as the VIX surged got part of the blame for Tuesday’s stock selloff, and analysts have warned that further ructions could lie ahead, recalling the “Volmageddon” episode that rocked markets in 2018.
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Meanwhile, the stock market’s quick rebound frustrated traders looking for a sustained pullback.
“I am growing increasingly frustrated with these one-day wonders as these single day wipeouts continue to be used as buying opportunities,” said technical analyst Mark Arbeter, president of Arbeter Investments, in a Thursday note.
With Tuesday’s slump, the stock market has seen “three nasty days in less than two months,” he said, with the first on Dec. 20 when the S&P 500 fell 1.5% and the second on Jan. 31 when the index dropped 1.6%.
The Dec. 20 drop was followed by a small, five-day rally, a minor pullback low, and then a record high. The Jan. 31 slide was followed by a seven-day rally to another round of highs.
Arbeter reiterated the market appears “certainly due for more downside technically,” but noted the major indexes remain in uptrends off their Oct. 27 lows. The S&P 500 fell near its 21-day exponential moving average — an important level of support on the chart — before bouncing. As of Thursday it stood at 4,930, and if it gives way, minor support and the 50-day simple moving average stand at 4,800, Arbeter said.
A drop below 4,800 would set up a “clear shot” to the downside at 4,600, which marks strong chart support, he said.
