After a rollercoaster week in the financial markets, Friday brought a relatively calm close, with stocks showing little movement following days of heightened volatility that left investors on edge. The S&P 500, which had just experienced its biggest rally in nearly two years, ended the day with minor changes. This quiet finish contrasts sharply with the tumultuous trading sessions earlier in the week, which saw a mix of panic selling and sharp recoveries. Despite the brief respite, the S&P 500 is on track for its fourth consecutive week of losses, marking its longest decline since September 2023.
August has been a particularly challenging month for markets, arriving at a time when investor sentiment was already wavering after a strong rally. Concerns grew over the Federal Reserve potentially being slow to respond to weakening economic data, which further unsettled traders. The selloff intensified when the Bank of Japan’s unexpected rate hike sparked a surge in volatility in the yen, impacting carry-trade investors and adding to market turmoil.
“Even though that nerve-wracking event is behind us, we’ve learned just how sensitive markets have become to cooling U.S. economic data, the far-reaching impact of the yen carry trade, and how conditioned investors are to expect rate cuts as the remedy for every market dip,” said Liz Young Thomas, head of investment strategy at SoFi.
Earlier in the week, traders had aggressively priced in rate cuts, but these expectations were dialed back to about 100 basis points of Fed easing for the year. However, a Bloomberg survey found that most economists predict only a quarter-point reduction in September—a forecast at odds with some of Wall Street’s calls for a more substantial cut at the next Fed meeting.
On Friday, the S&P 500 remained relatively unchanged, while the tech-heavy Nasdaq 100 faced its longest weekly losing streak since May 2022. Shares of Expedia Group Inc. rose on better-than-expected earnings, while Cisco Systems Inc. reportedly planned additional layoffs, according to Reuters. Meanwhile, Treasury yields on 10-year notes dropped by six basis points to 3.93%.
Michael Hartnett of Bank of America Corp. noted that despite the market’s turbulence, the situation had not yet reached levels that would signal a hard economic landing. “Key technical levels that would shift Wall Street’s narrative from a soft to a hard landing have not been breached,” he said. “Investor feedback is ‘frazzled,’ but expectations for Fed rate cuts mean that the preference for stocks over bonds remains intact, even after the market rout.”
As widespread selling gripped equity markets earlier in the week, a sentiment indicator plunged to one of its lowest levels in history, signaling extreme fear among investors. Dean Christians at SentimenTrader pointed out that this fear-driven drop in the stock-bond ratio—a measure that compares the S&P 500 against long-term Treasuries—could be a sign of potential market strength ahead. Historically, such low points in the ratio have been followed by strong returns, with the S&P 500 rallying in over 90% of similar instances since 1962.
Looking ahead, the absence of significant economic news until next Wednesday’s Consumer Price Index (CPI) release could result in a temporary lull in market volatility, according to Mark Luschini of Janney Montgomery Scott. However, he cautioned that August and September are typically weak months for equities, suggesting that volatility could return, especially in the context of a contentious presidential election.
Meanwhile, a Bank of America survey revealed that the number of investors betting on a weaker dollar has nearly tripled over the past month. Approximately 23% of respondents identified shorting the dollar as their highest conviction trade, up from just 8% in July, as the market braces for potential interest-rate cuts from the Federal Reserve.
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