Good news for investors who rode out the surge of stock-market volatility last week: Some analysts think a rally that began on Monday is going to continue, despite lingering economic uncertainties.
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“Even after the stock market recovered some of the losses from last week, we could still see equity inflows and outperformance into month-end,” JPMorgan Chase strategist Marko Kolanovic wrote in a note to clients on Tuesday.
Stocks plunged on Wednesday, with the Dow Jones Industrial Average plummeting more than 800 points — the fourth-largest daily point drop on record — after the spread between the Treasury’s 2-year yield and 10-year yield, which has historically preceded a recession when it turns negative, inverted for the first time in more than a decade.
But the drastic ups and downs in the markets were merely a result of technical drivers, like hedging by banks — essentially meaning that growth, inflation and monetary policy outlook weren’t really causing the drastic swings last week.
“More than half of equity moves were driven by systematic rather than fundamental trading,” Kolanovic said in the note. In total, he estimated that the sell-off resulted from $75 billion of algorithmic selling, not traders’ actual fear over market indicators.
Stocks posted their third straight session of gains Monday, with the Dow notching a triple-digit rise on the possibility of easier monetary policy set by the Federal Reserve and warming relations between the U.S. and China.
“On the positive side, we expect some stabilization in market volatility as dealers’ gamma positioning is now close to neutral (from a sizable short position last week), and this may reduce volatility and marginally improve liquidity,” he said. “We also expect some marginal stabilization and perhaps reversal of volatility targeting outflows.”