The "Black Monday" plunge, the US stock market "recovered" for the week, is the roller coaster ride ahead the new norm?

A sharp drop, a rebound, another drop, another rebound—followed by a slight upward movement, basically regaining lost ground.

This is the roller-coaster-like volatility of the S&P 500 this week. After a nearly 4% plunge on Monday, marking the largest decline since September 2022, the S&P 500 saw its biggest gain since November 2022, with market volatility seemingly increasing.

Similarly, this week, the international financial markets also experienced severe volatility, with significant fluctuations in global stocks, bonds, foreign exchange, and cryptocurrencies.

So, will this roller-coaster-like market trend continue in the future?

George Ball, Chairman of investment firm Sanders Morris, stated:

"From now until Labor Day, the market is prone to volatility. Low trading volume and the release of various economic data will make people excited."

The main reasons for market volatility: excessive trader behavior or significant deterioration in economic fundamentals

This week, the global financial markets experienced intense volatility, followed by a rapid rebound.

After a disappointing jobs report was released last Friday, US stocks plummeted on Monday. At the same time, the appreciation of the Japanese yen dealt a blow to carry trade strategies, leading to massive unwinding.

Vineer Bhansali, founder of asset management firm Longtail Alpha, views this as a "healthy adjustment":

"At present, this is a healthy adjustment. Crowded positions and panic led to accelerated selling, momentum trading resulted in everyone holding concentrated positions, and the lack of liquidity exacerbated the situation."

Michael de Pass, Global Head of Rates Trading at Citigroup Securities, pointed out that markets tend to overreact during intense volatility:

"When these intense fluctuations occur, the market always tends to overshoot, and that is exactly what is happening... This is an overshoot driven by the bond market, given the current level of the federal funds rate, the bond market has significant upside potential."

Jitesh Kumar, Cross-Asset Derivatives Strategist at Societe Generale, believes that the exit of quantitative funds also contributed to the sharp decline:

"Quantitative investors adjusting leverage based on volatility had to reduce exposure. The summer is not the most liquid period of the year, and fund flows based on volatility may have exacerbated the selling."

Over the next two days, US stocks fluctuated back and forth. On Thursday, as the decline in initial jobless claims exceeded expectations, easing concerns about weakness in the labor market, the stock market began a significant rebound. **A consensus gradually formed in the market: this volatility is mainly driven by excessive trader behavior rather than a significant deterioration in economic fundamentals In terms of corporate profitability, tech giants Alphabet, Amazon, and Tesla have seen their stock prices decline after their performance fell short of expectations. However, the overall situation remains robust. As of Friday, analysts expect the S&P 500 index's profit growth rate to be slightly above 14% in 2024 and 11.8% in 2025.

Max Kettner, Chief Multi-Asset Strategist at HSBC Holdings, stated:

"The fundamental situation is still a soft landing for the economy, and the stock market should continue to rise in the coming months. Concerns about profits have been exaggerated. We believe this is an overreaction of risk assets."

Next, Is "Roller Coaster" the Norm?

It is worth noting that despite market volatility, U.S. stock fund investors still seem optimistic.

According to a report citing EPFR Global data by Bank of America, investors poured nearly $10 billion into various equity funds, including $3.3 billion into technology funds, in the week ending Wednesday.

Gerry Fowler, Head of European Equities and Global Derivatives Strategies at UBS, stated:

"The initial panic reaction was overdone. The market will gradually regain confidence, but volatility is unlikely to return to extremely low levels, and the market may struggle to confidently reach new highs."