Economic Worries, Volatility Hit US Stocks

In a dramatic turn of events last week, the U.S. stock market faced a significant downturn, with the benchmark S&P 500 index falling below its crucial 50-day moving average—an indication often used by traders to denote the separation between bullish and bearish market conditionsThe spike in the VIX index, often dubbed the “fear gauge,” soared to its highest level since February, increasing by nearly 25% over the weekThis spike reflects growing fears among investors, fueled by lackluster economic data, and the Federal Reserve's ongoing concerns about trade and political risks.

The anxiety stemming from tariff discussions shows no signs of abating, and volatility in the market is likely to extend for the foreseeable futureAs trade tensions continue to loom, investors brace for potential disruptions that could ripple through economic sectors.

The economic landscape has shifted rather abruptlyRecent GDP growth figures for the fourth quarter of 2024 indicate a worrying trend, as stress on the economy appears to be mountingAccording to the latest readings, the composite PMI index—a critical barometer of economic activity—plummeted from January’s figure of 52.7 to a dismal 50.4 in February, marking its lowest level in 17 monthsNotably, the services sector, which is pivotal for the U.S. economy, slipped below the threshold of 50, indicating a contraction that has not been recorded since the beginning of 2024. Concerns regarding tariff impacts and a slowdown in domestic consumer spending have led to heightened pessimism among economists and analysts.

Consumers are becoming increasingly uneasy about the economic outlookA surprising drop in the University of Michigan’s consumer confidence index for February has raised eyebrows, with inflation expectations for the next five years climbing to 3.5%—a rate not seen since 1995. Following Walmart's disappointing earnings forecast, investor worry has escalated regarding the health of American consumers, who are crucial to driving economic growth

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Chris Rupkey, chief economist at FWDBONDS pointedly remarked, "If consumers hesitate in the face of rising prices, the economy could face a swift contraction."

The minutes from the recent Federal Reserve meetings reveal a cautious stance among policymakers, indicating that more substantial evidence of declining inflation is needed before considering any interest rate cutsSome members expressed that if the economy remains robust with persistent inflation, rates might cling to elevated levelsPotential shifts in trade and immigration policies, geopolitical tensions that disrupt supply chains, and consumer expenditure that exceeds expectations are all cited as risks that could drive inflation higher.

African-American Atlanta Fed President Raphael Bostic noted ongoing uncertainties created by trade tariffs and immigration policy, both of which have implications for inflation and job marketsHe explained, "Businesses worry that tariffs may inflate their costsIf that happens, they might shift these costs onto consumers through higher prices."

Long-term yields on U.STreasury bonds have experienced a mild retreat, with the 2-year bond, closely aligned with interest rate expectations, dropping by 6.6 basis points to reach 4.19%. The benchmark 10-year Treasury also declined by 5.7 basis points, settling at 4.42%. The anticipation of the Fed easing interest rates has gained traction once againMarket pricing now indicates a 55% probability—up from about 40% at the start of the week—that rates will be cut twice before the year concludes.

Goldman Sachs has recently revised its predictions for the Fed’s monetary policy, suggesting the market may still be underestimating the inflationary impacts of tariffsThis signifies that investors might not have fully accounted for the sustained price pressures while estimating future interest rates. "The Fed is in a position to maintain patience until it has a better understanding of the potential anti-inflationary trends and the implications of trade and fiscal policies," commented an analyst.

Understanding the trajectory of market volatility is vital as the U.S. equity markets grappled with turbulent performances last week, culminating in a sell-off spurred by fresh tariff threats and increasing fears about softening consumer demand

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The Dow Jones Index reached its lowest point since January 16, reflecting broader market anxiety.

Fluctuations were apparent across various sectors, according to market statisticsConsumer discretionary and communication services plummeted over 4%, with tech giant Meta seeing a decline of more than 7% after a notable 20-day riseComparatively, utility, energy, and healthcare sectors fared better, posting gains exceeding 1%.

Stephen Innes, managing director at SPI Asset Management, aptly noted in his report, "The market has a tendency to overlook issues until they are unavoidable, and now the risk of stagflation—which was once deemed a relic of the 1970s—is cautiously resurfacing." This statement reflects a growing concern that the economic pressures could lead to a period of stagnated growth amidst rising prices.

Investment firm AXS Investments’ CEO Greg Bassuk observed that consumer sentiment, tariffs, and corporate earnings have overtaken technological trends as the primary drivers of market directionHe further emphasized, "Uncertainty is the new narrative, triggering fresh waves of volatility last weekWe anticipate that leading up to the end of the first quarter, this uncertainty will continue to breed market turbulence."

The third quarter earnings season is approaching its conclusion, with around 425 companies from the S&P 500 having reported—76% of which surpassed Wall Street's expectationsAnalysts projected a robust year-on-year earnings growth of 15.7% for the S&P 500 in the fourth quarter, marking a significant uptick from the initial forecast of 7.8% at the year's outset.

However, apprehensions regarding consumer trends have intensified following Walmart’s uninspiring earnings guidanceIn the coming week, several major retail players, including Home Depot and Lowe's, are set to disclose their earnings, which will capture heightened scrutiny from market watchersAdditionally, leading semiconductor firm NVIDIA will release its earnings report, and how it reacts to pressures from competitors like DeepSeek will be of substantial interest

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Charles Schwab highlighted the sustained selling pressure in the U.S. equity markets during the last two trading days of the weekThe firm outlined that several short-term bearish risks are associated with stocks that have significantly appreciated in the last year beginning to falterIn addition, signs suggest that American consumers are tightening their belts, combined with a stubborn market grappling with heightened uncertainties in fiscal and trade policies.

Typically, late February is recognized as a weak period for stock marketsMovements in Treasury yields and the VIX index often correspond with typical "risk-off" behaviors from investorsThe upcoming earnings from NVIDIA will be particularly critical; given the recent challenges posed by DeepSeek, tighter scrutiny from investors could lead to pronounced stock price fluctuationsThe implied volatility of options in the market has notably surged to 9%. If NVIDIA can demonstrate sustained demand for its AI chips, it might provide bullish momentum for the entire tech sectorConversely, if the news is not favorable, a new wave of selling pressure could ensue, thereby further elevating overall market volatility risks.