Market Recap: Volatility Returns at New Highs
Volatility returned to Wall Street after stocks in the U.S. spent most of last week hovering near record highs before plunging Friday on renewed trade tensions. The S&P 500 fell more than -2.5% that day and nearly the same for the week, trimming its year-to-date gain rather significantly. All other major indices fared even worse with small caps lagging the most, down nearly -5%.
Early in the week, optimism around AI and easing monetary policy hopes lifted markets aided by a surprise Japanese election rally and AMD’s 40% surge on news of an OpenAI partnership. Sentiment cooled midweek after slightly higher inflation expectations and reports of an Oracle loss on Nvidia chip rentals, then briefly rebounded Wednesday following a larger-than-expected New Zealand rate cut.
Friday’s tariff escalation, when President Trump accused China of “sinister” rare-earth maneuvers, sparked broad selling, especially in tech and cyclical sectors. Defensive areas offered little shelter, leaving equities broadly lower despite continued optimism for Fed easing later this year.
Rates, Dollar & Commodities
Treasury yields drifted somewhat lower through midweek before collapsing on Friday, with the 10-year note yield ending near 4.05% as investors sought safety. The dollar softened modestly but firmed late in the week despite the lower yields with a risk-off tone. Gold extended its record run above $4,000 an ounce, up roughly 2% for the week and over 50% YTD, while silver reached its highest level since 2011. Oil prices slumped more than 5% Friday on demand worries, and industrial metals were mixed amid renewed trade tensions.
Takeaway
Overall, the week underscored markets walking a tightrope between optimism over AI-driven growth and the risks of trade and policy missteps. With yields softening, the dollar in flux, and gold surging, investors appear to be balancing bets on lower rates with growing hedges against geopolitical and inflation uncertainty.
Source: stockcharts.com
Looking Ahead
The government shutdown will delay key reports like CPI, PPI, and retail sales, leaving markets to rely on a few second-tier indicators for insight into the economy. The Empire Manufacturing Survey (Wednesday) and Philly Fed Index (Thursday) will offer the first look at October activity. This is historically a volatile report but should be more important than usual in a data-light week.
The Fed’s Beige Book (Wednesday), which compiles reports on business conditions across the numerous Fed districts, will also draw added attention for signs of stability. If it points to slowing growth or labor softness, it could reinforce expectations of multiple rate cuts by year-end. Several Federal Reserve Board members are also scheduled to speak this week, and with hard data scarce, investors are likely to parse every word for hints on policy direction.
Broad Overview
Markets continue to juggle several crosscurrents, but optimism still dominates the narrative. Expectations for further Fed rate cuts, robust AI-driven investment, and resilient consumer spending have helped lift major U.S. indices to record territory. Inflation has cooled sharply from its 2022 peak, and the labor market continues to soften in an orderly fashion, encouraging hopes for a durable expansion rather than a downturn.
Yet beneath the surface, a few warning signs have emerged. High-yield credit spreads have been quietly widening recently, marking a shift in risk appetite as investors began demanding more compensation to hold lower-quality debt. Meanwhile, market breadth has been deteriorating, with fewer stocks participating in the rally even as indices achieved their new highs. Historically, such divergences often act as “canaries in the coal mine,” suggesting that investor optimism may be running ahead of underlying market health.
The bond market, long regarded as the economy’s truth-teller, still signals confidence in a soft landing: Treasury yields have eased as investors anticipate additional rate cuts. Even so, the recent widening in credit spreads and weakening breadth hint that financial conditions could tighten beneath the surface. As the calendar moves deeper into October, a historically a volatile month, market leadership may grow more uneven before the typically strong fourth-quarter tailwinds reassert themselves. The key question now is whether investor optimism can stay grounded despite those early warning signs in credit and participation.
Stay tuned as we’ll continue to monitor these crosscurrents and keep you up to date as conditions evolve. Should you have any questions regarding your current strategy or the markets in general, please reach out to your CIAS Investment Adviser Representative.
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