Wall Street Stocks Edge Up at the End of Wild Week

The market wrapped up a chaotic week with relatively calm trading on Friday, as investors remained cautious following a historic surge in volatility.

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After experiencing its largest rally in nearly two years, the S&P 500 showed minimal movement on Friday. The index was on course for its fourth consecutive week of losses, marking the longest losing streak since September 2023. Investor sentiment remained delicate after the recent market upheaval, especially as valuations and investor positions appeared stretched.

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Equity traders have faced a tumultuous period, fueled by growing concerns that the Federal Reserve may delay cutting interest rates, potentially leading to an economic recession. The market selloff intensified when a rate hike by the Bank of Japan triggered a surge in yen volatility, disrupting carry-trade investors. As these investors scrambled to close their short positions in the Japanese currency, the resulting shockwaves were felt across both developed and emerging markets.

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Liz Young Thomas from SoFi commented on the situation, saying, "Even if that nerve-racking event is over, we learned how sensitive markets now are to cooler US economic data, how broad-reaching the impact of the yen carry trade can be, and how conditioned investors are to expect rate cuts as the salve for every scrape."

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Earlier in the week, traders were pricing in aggressive rate cuts, but by Friday, expectations had been tempered to about 100 basis points of easing by the Federal Reserve this year. A large majority of economists surveyed by Bloomberg predicted only a quarter-point rate cut in September, which contrasts with some major Wall Street banks' calls for a more substantial reduction at the next meeting.

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On Friday, the S&P 500 edged up by 0.3%. Expedia Group Inc. saw gains following better-than-expected earnings, though the company did caution about "softening" travel demand. Akamai Technologies Inc. also performed well, raising its full-year earnings forecast. Meanwhile, 10-year Treasury yields dropped by five basis points to 3.94%.

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Michael Hartnett at Bank of America Corp. noted that the recent turbulence in global financial markets hasn't yet reached levels that would signal a hard economic landing. He explained, "Technical levels that would flip Wall Street’s narrative from soft to hard landing have not been broken. Investor feedback is 'frazzled,' but expectations of Federal Reserve rate cuts mean that preference for stocks over bonds hasn’t been ended by the market rout."

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As broad-based selling gripped equity markets earlier in the week, a sentiment indicator fell to one of its lowest levels on record, highlighting extreme fear among investors.

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Dean Christians at SentimenTrader pointed out that the stock-bond ratio, which compares the S&P 500 against long-term Treasury bonds, is a useful gauge of market sentiment and can indicate whether stocks are cheap or expensive relative to bonds. Christians noted that similar periods of panic-driven fear in the past have often been followed by strong market returns.

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Since 1962, the stock-bond ratio has dropped this low only 13 times, and in over 90% of those instances, the S&P 500 rallied within a year.

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In summary, the market's subdued action on Friday capped off a wild week characterized by significant volatility and investor anxiety. While fears of a recession and concerns over the timing of Federal Reserve rate cuts have rattled traders, historical data suggests that such periods of extreme fear can sometimes precede strong market recoveries. As investors continue to navigate this turbulent environment, many remain hopeful that the market's recent woes will eventually give way to more favorable conditions.

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