Wall Street has seen heightened levels of volatility this week, with triple-digit intraday swings in either direction providing excellent trading opportunities.
We take a look at some of the recent activity, examine the economic forces shaping the market at the moment and discuss where Wall Street may head next.
The Dow gained just over 145 points on Tuesday, 13 July – a daily increase of 1.44%. But after a flat day on Wednesday, the market was trading more than 100 points in the red on Thursday, 15 July before another triple-digit gain took it to within eight points of its opening level. But what is behind these large fluctuations?
Mixed earnings results
For many bullish investors, the US earnings season was due to be the Dow’s talisman; a solid performance by key corporations, across a wide range of sectors, was meant to trigger a convincing rally. However, while the earnings season started well, with Alcoa’s $136 million second-quarter profit comparing favourably with a $454 million loss during the same period last year, later results were less upbeat.
Google was one of the big-name disappointments of this round of earnings, despite healthy net revenue (post traffic acquisition costs) of $5.1 billion – up 24% on last year. The web giant’s pro-forma earnings, the benchmark by which most investors judge the company, were $6.45 per share – around 10 cents less than most expectations.
Similarly, while Intel’s numbers were well received, JPMorgan’s results have been met with a somewhat cooler response. In short, the mixed fortunes of corporations have left investors without a clear picture of the microeconomic landscape in the US and may well have contributed to the Dow’s recent inability to stay on track.
Conflicting macro data
Macroeconomic data has also provided a very unclear picture for investors. A number of surveys have come in with worse-than-expected figures, including a second consecutive monthly drop in retail sales on Wednesday. On the flipside, there has been good news for the Gulf of Mexico region; BP’s announcement that it has fully capped the oil leak for the first time since April may have a positive knock-on effect for the economy.
However, this good piece of localised news has to be seen against the backdrop of cautionary words from the Federal Reserve which hinted at possible deflation and indicated that the economy was struggling for momentum.
The other key issue in play at the moment is China’s role as a trading partner for the US. While analysts debate the minutiae of Asia’s largest economy, there seems to be clear signs that growth rates are diminishing. As such, Wall Street has become increasingly sensitive to economic news from China, adding to higher levels of market volatility.
What next for Wall Street?
As we have seen, current levels of volatility have been caused by an influx of mixed data, both on a macro- and microeconomic level. While some investors may be hoping for markets to settle into a steadier pattern, there is plenty of data left to come in the short-term and further mixed signals could keep volatility high.
It is also worth keeping an eye on further big-name corporate results, with Bank of America and Citigroup both due to report later today. However, any company-led bounces may be short-lived if the macro data doesn’t strengthen.
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Will the US market rally more convincingly? Is weak macroeconomic data going to set the tone and drown out upbeat individual performances? Or is volatility on Wall Street set to continue?
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Updated: 16/07/10
The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.