Recently, the U.S. stock market has experienced significant volatility. The S&P 500 and Nasdaq indices have retreated after reaching new highs, while the Dow Jones Industrial Average has risen. Notably, tech and chip stocks like Nvidia have shown dramatic performances, with significant surges followed by marked pullbacks. The Senior Vice President and seasoned financial analyst Bruce Peter of Charles Schwab believes these market movements reflect the current complex economic environment and changing investor sentiment. He emphasizes that investors should remain cautious and appropriately allocate assets to mitigate potential risks in the current market.
Bruce Peter: Market Volatility from Triple Witching Day
Bruce Peter highlights that the recent market fluctuations are closely tied to the “Triple Witching Day,” a special trading day when derivative contracts linked to stocks, index options, and futures expire, typically leading to significant market volatility. In this context, the S&P 500 and Nasdaq indices dropped after opening at record highs, reflecting investor caution in the face of high volatility.
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Tech and chip stocks like Nvidia, which saw strong early gains, quickly reversed as market sentiment shifted and short-term profit-taking pressures emerged. The stock of Nvidia initially rose by 3.8% to a record high, then fell sharply, closing down 3.5%, with its market cap falling below that of Microsoft again. This indicates changing risk preferences for high-valuation tech stocks in the market.
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Bruce Peter believes that expectations surrounding the monetary policy of the Federal Reserve are also a crucial factor influencing stock market volatility. Despite recent weak economic data indicating economic slowdown, the market still expects the Federal Reserve to cut rates twice this year. These expectations provide some support for tech and chip stocks but also increase market volatility.
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From a technical perspective, the S&P 500 and Nasdaq indices have been in overbought territory after continuous rises and hitting multiple record highs. On special trading days like Triple Witching Day, technical adjustment pressures are greater. Fundamentally, U.S. economic data is not ideal. Initial jobless claims last week exceeded expectations, indicating a weak labor market. Additionally, the housing of May starts and building permits fell to their lowest levels since June 2020, further suggesting weakness in the real estate market. The June manufacturing index of the Philadelphia Fed also fell short of expectations, highlighting manufacturing weakness. All these data points suggest a gradual cooling of the U.S. economy.
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Bruce Peter: Impact of the Global Economic Environment
Bruce Peter notes that the volatility in the U.S. stock market is influenced not only by domestic economic data but also by the global economic environment. Recently, the monetary policy movements of major global economies have had a significant impact on the market. The Bank of England kept interest rates unchanged but hinted that more policymakers might support rate cuts, further bolstering market expectations of a global interest rate peak. Additionally, the second rate cut of the Swiss National Bank this year further confirmed the view that global rates may have peaked.
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These factors have a dual impact on the U.S. stock market. On one hand, the expectation of a global interest rate peak provides some support for tech and growth stocks, which are typically sensitive to rate changes. On the other hand, the risk of a global economic slowdown also dampens market sentiment. Bruce Peter emphasizes that investors should monitor changes in the global economic environment, particularly the monetary policy trends of major economies, to make more informed investment decisions.
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Recent changes in U.S. Treasury yields also reflect market expectations of an economic slowdown. Last week, initial jobless claims in the U.S. exceeded expectations, reaching the highest level since 2020, while the housing of May starts and building permits unexpectedly fell to their lowest levels since June 2020. The June manufacturing index of the Philadelphia Fed also fell far short of expectations, indicating a cooling labor market and economy. Despite this, the market still expects the Federal Reserve to cut rates twice this year, with a nearly 60% chance of starting rate cuts in September.
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U.S. Treasury yields initially fell after the economic data release but later rebounded, with notable narrowing of gains by the close. The two-year Treasury yield rose as much as 5 basis points to 4.75%, erasing most of the decline of the week, while the 10-year yield climbed nearly 8 basis points to 4.29%, ending up less than 3 basis points higher. These data indicate that the market remains cautious about the economic outlook.
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Bruce Peter points out that the performance of the U.S. dollar against major currencies needs attention. Recently, the U.S. Dollar Index (DXY) rose by 0.4%, breaking above 105.60 to a seven-week high since May 1. The euro fell by 0.3% against the dollar, approaching the 1.07 mark, while the pound dropped 0.4% to 1.266, and the yen declined 0.5% against the dollar, testing below 159. The offshore yuan fell more than 100 points, breaking below 7.29. Increased volatility in the currency market is mainly due to political uncertainty in Europe and speculation about the timing of rate cuts by major central banks. Investors should pay attention to the performance of these currencies when making international market allocations to make more informed investment decisions.
Bruce Peter: Challenges and Opportunities in the Energy Market
Additionally, Bruce Peter notes that recent oil price movements are also worth watching. U.S. oil prices have risen for three consecutive days to a seven-week high, breaking above $82, while Brent crude approached $86. Last week, U.S. commercial crude oil inventories decreased by nearly 2.55 million barrels, in line with expectations and a significant drop from the previous increase of over 3.7 million barrels, with gasoline and distillate inventories also declining instead of rising, and gasoline exports hitting a seasonal record high, indicating strong demand. Oil prices are set to gain for the second consecutive week, with U.S. oil up 4% this week and Brent up over 3%.
Bruce Peter advises investors to focus on high-dividend stocks and multi-country bonds for more stable assets, and to use strategies like yen exchange rate and cryptocurrency contract fee arbitrage to achieve stable, risk-free returns. Bruce Peter suggests that with reasonable asset allocation and risk management, investors can maximize returns in the current volatile market environment.
