Hold onto your seats, stock market investors. The wild ride has likely just begun.
The opposing forces of economic sentiment that briefly drove U.S. stocks down more than 1,000 points in early trading Monday, then took investors on a wild roller-coaster ride for the remainder of the session, were hardly dissipated by their exertions, most experts say. Minus some firm signal from overseas markets, the tumult is likely to continue on Tuesday.
“The market is wounded,” DoubleLine Capital co-founder Jeffrey Gundlach, widely followed for his investment calls, told Reuters on Monday afternoon before the session ended with the Dow Jones Industrial Average down 588 points, or 3.6 percent, at 15,871.
“And it takes time for people to get around to feeling good again,” he said.
Many analysts said the market’s sharp tailspins — beginning with a record Dow Jones Industrial Average intraday record plunge of 1,089 points — and opposing steep climbs during Monday’s session, reflect a high degree of uncertainty about global growth, largely focused on China, and underlying questions about whether the U.S. economy has found solid footing.
Absent any clearer signals about the health of either country’s economy, analysts say the battle will continue between those who believe the markets have overreacted and those who think the worst is yet to come.
One ominous indicator of that tug-of-war between the bulls and bears is an analytical tool known as the CBOE Volatility Index, which tracks market expectations through S&P 500 stock index option prices.
The index, considered by many to be the world’s premier barometer of investor sentiment and market volatility, has remained in the teens for most of the past year, save for a few spikes into the low 20s. On Aug. 10, it began shooting skyward and closed just above 40 on Monday — its highest level in five years.
That puzzles some analysts, who say that the news hasn’t been that bad since China’s surprising devaluation of the yuan on Aug. 11, even considering the 9 percent sell-off in Chinese shares on Monday.
Among them is RBC’s chief U.S. market strategist, Jonathan Golub, who wrote early Monday that there has be no clear reason for the recent sell-off, which has now sent U.S. stocks down for five straight days.
“What has been most interesting about last week’s 6 percent market decline is the absence of a visible catalyst,” he wrote in a note recommending clients consider buying. “2Q corporate results have broadly surprised to the upside and signs of global financial distress remain well-contained. History shows that buying stocks following a spike in volatility in the absence of a well-defined catalyst is a winning strategy.”
In the near term, most analysts expect China to drive the narrative that will give global markets — including the U.S. — their direction.
Most anticipate that Chinese officials will take some sort of action — possibly another interest rate cut — to stem the shellacking that its stock market, the Shanghai Composite, has taken since mid-June.
Previous efforts by the Chinese government to accomplish that have not worked, so it’s likely that no matter what come out of Beijing overnight, the markets will remained rattled heading into Tuesday’s trading sessions.
“The market’s going to be focused on China tonight to see if they come on tonight with something that would be considered a viable (way) to stimulate growth in that economy,” Quincy Krosby, market strategist at Prudential Financial, told CNBC on Monday.
If that doesn’t happen, expect more of the same on Tuesday.