A smooth stock market on the surface is masking nerves and turbulence
The stock market is more volatile lately, making investors more picky about what they want to own.
It’s possible to miss some of the dramatic undercurrents gripping the stock market right now by looking only at the surface.
The Dow Jones Industrial Average DJIA closed only 0.3% higher for the week, despite an earlier rush into value stocks that swept it above the 48,000 threshold for the first time ever.
Yet the blue-chip index went on to log back-to-back declines totaling 2.3% over Thursday and Friday, according to Dow Jones Market Data. A similar pattern played out with the S&P 500 index SPX, which gained only 0.1% for the week after shedding 1.7% over the last two sessions.
“When you think of all the volatility we’ve seen this week,” said Joe Mazzola, head trading and derivatives strategist at Charles Schwab, one might assume a profound difference between the number of declining stocks versus those that advanced, he said.
The week started out with more S&P 500 stocks advancing than declining, as the below FactSet chart shows. That switched significantly midweek, but still left the weekly tally almost evenly split.
A big rotation could be seen in the S&P 500 over the past week.
“That tells me something has been shifting among investors in terms of what sectors they are willing to hold,” Mazzola said.
The S&P 500’s healthcare sector XX:SP500.35 was up 5.2% in November through Friday, according to FactSet, while its energy stocks XX:SP500.10 were 4% higher and its information-technology sector XX:SP500.45 was down 3.8% on the month so far.
“A lot of people were betting on the [Federal Reserve’s] rate cuts,” Mazzola said of the dip-buying and speculative behavior that has dimmed since late October.
Bitcoin (BTCUSD), the world’s largest cryptocurrency, fell deeper into a bear market after falling below the $100,000 mark in the past week, while other risky plays were hit hard by selling.
Read: Crypto ‘whales’ are selling bitcoin as it sinks further below $100,000. Should investors be worried?
“Bad companies are selling off more than the rest of the market,” said Gene Goldman, chief investment officer at Cetera. With that, he doesn’t see a bear market in stocks, nor a recession lurking.
Drivers to watch
The recent selloff appears to have let some froth out of the market, but without endangering the three-year bull run in stocks.
The S&P 500 has bumped up against its 50-day moving average, a popular trend indicator, but has not yet broken through to the downside.
However, there has been a “real weakening of the trend,” Mazzola at Schwab said. “Yes, it bounced off the 50-day moving average – that’s good – but you can only knock on that door so many times before it opens up.”
In recent days, several Federal Reserve officials signaled a more cautious tone about a December interest-rate cut, shifting the odds of another cut this year to roughly a coin toss, from closer to 94% a month ago, according to the CME FedWatch Tool.
“We’ve seen these cycles before when the market gets too excited about potential rate cuts and then it gets walked back,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.
The 10-year Treasury yield BX:TMUBMUSD10Y climbed to 4.14% on Friday, a gain of almost 20 basis points from a one-year low in late October. That suggests inflation concerns remain a part of the equation, Ripley said, despite recent focus on a weakening U.S. labor market.
“We are leaning toward the inflation side of things,” he said, noting there isn’t much the Fed can do to mitigate job losses driven by artificial intelligence or layoffs in the government and construction sectors. “A rate cut isn’t going to help that,” Ripley added.
Higher longer-duration borrowing rates, however, could keep the housing market on ice, stifle returns in the highflying tech sector and potentially point to a slowing labor market, plus a toxic brew of inflation.
“I would watch where bond yields are going, because that suggests that something could be breaking or something is not working,” Goldman at Cetera said. “Or, that it’s more than just AI – it’s an inflation scare.”
Finding balance
Recent bouts of selling in megacap tech stocks certainly have gotten a lot of attention. That’s largely because a few stocks have driven so much of the performance of the entire S&P 500.
Some investors worry about when AI spending might start paying off for tech companies, while others appear to be booking some profits after a stunning rise for the stock market from its tariff lows seven months ago.
“So long as investors can stay focused, there’s a lot of opportunity in the volatility,” said Adam Hetts, global head of multiasset and a portfolio manager at Janus Henderson Investors.
Hetts thinks the bull market has legs, the U.S. economy will keep modestly growing in 2026, and that inflation will remain sticky but without a “runaway spike.” He also expects more rate cuts from the Fed to eventually emerge.
“This volatility is an opportunity to focus on names with more staying power,” he said.
-Joy Wiltermuth -Gordon Gottsegen
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