Recovery in Stock Market Following Inflation-Triggered Decline: Crucial Insights for Investors
The stock market has experienced its fair share of ups and downs in recent months, leaving investors puzzled about the true driving force behind the bull market. However, a recent decline triggered by inflation concerns was quickly followed by a recovery, providing crucial insights for investors.
On Tuesday, the January consumer-price index came in higher than expected, causing investors to reassess their expectations for rate cuts by the Federal Reserve. This led to a sharp drop in stocks, with the Dow and S&P 500 both losing 1.4% and the Nasdaq Composite shedding 1.8%. However, over the next two days, stocks managed to regain most of the losses, with the S&P 500 ending Thursday at its 11th record close of 2024.
According to Tim Hayes, chief global investment strategist at Ned Davis Research, the recovery in stocks can be attributed to the fact that a mere delay in rate cuts is not as catastrophic as initially feared. He distinguishes doubts about the timing of something bullish, such as rate cuts, from fears about something bearish, like resurgent inflation or collapsing economic growth. This perspective helped calm investors’ concerns.
The bounce in stocks and a pullback in the Cboe Volatility Index (VIX), which measures expected S&P 500 volatility, further supported the notion that fears of renewed inflation were not driving the market lower. NDR’s Hayes explains that if equities had been driven lower by rising fear, the recovery and drop in the VIX would not have been observed.
However, there are still jitters among some market watchers regarding bets on declining volatility through the options market. The forced unwinding of these positions when the VIX surged was partly blamed for Tuesday’s stock selloff. Analysts warn that further turbulence could be on the horizon, reminiscent of the “Volmageddon” episode that shook markets in 2018.
While some traders were frustrated with the quick rebound in the stock market, technical analyst Mark Arbeter notes that the market remains in an uptrend since its lows in October. He suggests that the market may be due for more downside technically but highlights important levels of support on the chart. The S&P 500’s 21-day exponential moving average and the 50-day simple moving average serve as crucial support levels, with a drop below them potentially leading to further declines.
In conclusion, the recovery in the stock market following an inflation-triggered decline provides valuable insights for investors. It indicates that fears of renewed inflation were not the driving force behind the decline and subsequent rebound. While concerns over declining volatility and technical indicators suggest potential downside risks, the market’s overall uptrend remains intact. Investors should closely monitor data releases and market trends to make informed decisions amid the current market environment.
