A Dow Record or S&P 500 Volatility: Which Will Carry More Weight Moving Forward?

The perception of market sentiment heading into the new trading week can be very different depending on where you look. On the one hand, the Dow closed at a record highs and the S&P 500 posted its biggest rally in months on Friday. On other, volatility is picking up in frequency and intensity. 

Talking Points:

• Last week’s volatility was a notable pick up in ‘unwanted’ charge to a level not seen since November
• While the Dow moved above 50,000 and Nasdaq 100 broke its congestion support, the big picture still does not register a clear and motivated trend
• Event risk ahead skews towards the US with the retail sales and business confidence; a delayed NFPs and update to CPI arm of the dual mandate

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A Rebound to End the Week but Lingering Concern Over Volatility

The global markets were a mixed bag this past week. US indices closed out the period with a strong rally that saw the Dow clear weeks of congestion to close at a record high above 50,000, while the S&P 500 mounted its biggest single-day rally in eight months. That said, this bid would not likely have arisen without the notable tumble that preceded the rebound with benchmarks  like the S&P 500 and Nasdaq 100 first crashing below prominent support levels. So, through all this back and forth, what are we ultimately left with as far as a go-forward view of speculative conviction? The aforementioned indices present different technical standings. More broadly, if we look outside the popular bubble of US equities, the jolt of fear was far from universal. On the extreme bear side, we witnessed an extended tumble from crypto markets and even precious metals as they took on a speculative (rather than haven) bearing. Alternatively, global equities held up well via measures like the VEU ‘rest of world’ (non-US) ETF while emerging markets and yen-backed carry trades climbed.

Chart of S&P 500 with 100-Day Moving Average and 1-Day Rate of Change (Daily) 

Source: TradingView.com; Standard & Poor’s; John Kicklighter

There are meaningful fundamental threats to risk aversion if speculative appetite were to untether from balloons of complacency and instead attach to the systemic anchors. A more finely tuned gauge for sentiment is the relative appetite for risk assets. In favorable conditions, market participants tend to prefer assets with the greatest absolute potential for capital gains – with a lesser consideration to yield income. Conversely, when those high beta benchmarks are retreating relative to their peers, it suggests that confidence may not be as robust as a singular measure may suggest. Consider the ratio of the Nasdaq 100 to the Dow Jones Industrial Average (tech-oriented mega cap stocks versus stoic blue chips) which dropped to an 8 month low or the S&P 500 relative to the RSP equal-weighted SPX component index which dropped to a 5-month low.

Chart of S&P 500 to RSP Equal Weighted S&P ETF Ratio (Daily)  

Source: TradingView.com; Standard & Poor’s; John Kicklighter

 

There is a transition away from the best performing – or alternatively, ‘most expensive’ – pace-setters even if there isn’t yet a universal unwind. Furthermore, there is a backdrop of increasingly frequent and larger scale periods of volatility. Concern of (and hedging against) unfavorable moves in long-only markets is the preceding step to a more sweeping move, though it does not always signal a market-wide unwind. Ultimately, the best measures of a true ‘risk off’ swale is a broad (as well as highly correlated) and ‘significant’ retreat in sentiment-oriented markets.

Chart of Risk Aversion Intensity Scale  

Source: John Kicklighter

 

A Calendar Skewed Towards the US and Without Clear Undercurrents 

With sentiment unclear for both direction and momentum while the global macro calendar dials back the top listings, it is important to adjust our expectations around the potential for event risk. While it is always possible that a release happens to hit when risk appetite is charged or the surprise is so substantial that it can override the market’s engrained inertia, those are low probability circumstances. 

As such, it is more likely that the top listings on tap will see most of their influence through regional and naturally higher volatility assets. Outside of the run of high visibility indicators scheduled for release on the US economic docket and listings from the earnings calendar, there is little top shelf event risk that won’t be overridden by mitigating circumstances – Japan’s Eco Watchers and lending by the snap election, UK GDP by political headlines and China’s data by long-standing doubt over its accuracy.

Calendar of Top Global Macro Event Risk
 
Source: John Kicklighter

 

What is the Lynchpin in the US Economic Engine?

The first round of event risk with meaningful potential comes Tuesday. Setting aside the run of earnings on the day (BP, Coca Cola, AstraZeneca, Ford) considering the Mag 7 failed to establish market-wide guidance, the combination of US small business confidence and consumer spending will provide an important, timely and upstream read on the world’s largest economy. The NFIB’s Small Business Optimism Index will update on the health of the largest source of US employment and arguably the most sensitive node to tariff-influenced raw material costs, interest rates, tax rates and volatile consumer demand. 

The reading has held well above its five-year average (94.8) with last month’s reading at 99.5. This is in stark contrast to consumer confidence via both the University of Michigan and Conference Board measure. Which is leading and lagging? Which the true measure of economic health moving forward? Consumer spending figures is likely the lynchpin in this cycle, but retail sales has not collapsed, though the surge in credit through the month of December raises reasonable concern.

Chart of US NFIB Small Business Confidence, US Retail Sales and US Recessions (Monthly)

Source: TradingView.com; NFIB; US Census Bureau; John Kicklighter

 

A Delayed NFPs and More Data to Consider

If you missed it last week, the Bureau of Labor Statistics did not release their January labor report due to the short-lived, partial shutdown of the federal government (again). The revised release date was set to Wednesday at the standard 13:30 GMT release time. While the general circumstances haven’t changed much from what we had to consider heading into the original release time, there has been some external labor data this past week that can add some context to expectations (the economist consensus is for a 40K net addition in payrolls). 

The ADP private payroll report fell short of forecasts (22K added versus 35K expected), the ISM service sector employment component weakened unexpectedly (51.7 to 50.3), Challenger reported the largest number of January job cuts since 2009 (108.4K) and job openings in the JOLTs report fell to (6.54 million) the lowest level since September 2020. This does not bode well for the US labor market.

Chart of Change in NFPs and Surprises (Monthly)

Source: John Kicklighter; Bureau of Labor Statistics

 

Inflation and the President Will Add Key Pressure to Rate Forecasts

Depending on whether NFPs amplifies the concern around the trajectory of a weakening labor market or temporarily curbs its, there will be a material impact on how much influence the Friday consumer price index (CPI) report for December has on markets like the US indices and Dollar. Debate around the Federal Reserve has eased recently following the January hold on rates by the FOMC and President Trump’s announcing his support for Kevin Warsh as the next Chairman of the central bank - taking over for Jerome Powell in May. Naturally, the President made provocative statements to the effect that he expects Warsh to cut rates when he takes office, but the markets have not meaningful increased forecasts for cuts in 2026. 

Many believe Warsh will be data dependent as well, which means that the balance of the dual mandate (moderate inflation and full natural employment) will still take precedence. While the average job additions have slowed over time, the jobless rate is still very low on a historical basis. Meanwhile, inflation is still elevated above the 2 percent stated inflation target. Headline and core annual CPI rates are expected to slow – 0.1 ppt to 2.5 percent and 0.3 ppt to 2.4 percent respectively – which would raise the potential of more and faster cuts.

Chart of Fed Dual Mandate - US Jobless Rate and Core CPI (Monthly) 

Source: John Kicklighter; Bureau of Labor Statistics

 

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-- Written by John Kicklighter, Global Head of Content

 

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