The Stock Market Recap: What Investors Need to Know
The stock market ended last week flat after a turbulent period of steep sell-offs and heightened volatility. Factors such as weak economic data, deleveraging, crowding, and poor liquidity played a role in exacerbating the downturn.
During the market rout, stock correlations and volatility saw a significant spike, with the VIX hitting an intraday high of 66 on Aug. 5, a level not seen since the March 2020 sell-off and the 2008 Financial Crisis.
Goldman Sachs strategists predict that both stock correlations and implied volatility will gradually recede back to normal levels over the next few months, based on historical patterns from similar episodes in the past.
The direction of the equity market will hinge on upcoming data releases clarifying the economic outlook, determining whether the focus remains macro-driven or shifts back to a micro-driven environment.
Key data points to watch include labor market and consumer data, as well as weekly jobless claims, retail sales, Walmart's earnings, and Federal Reserve surveys on labor components. Inflation data is expected to have a lesser impact unless there are significant surprises.
If economic indicators support an optimistic view, investors may pivot back to alpha opportunities rather than market betas, according to Goldman Sachs strategists. The recent sell-off could present an attractive opportunity to buy stocks with strong fundamentals at discounted valuations.
Implied volatility is likely to remain elevated leading up to Election Day, but a focus on specific policy implications could help increase sector and stock dispersion.
In conclusion, investors should stay informed on key economic data releases and market trends to make informed decisions about their portfolios. Keep an eye on labor market indicators and consumer sentiment, as they could provide valuable insights into the future direction of the market.