Investing.com -- Yardeni Research in a note dated August 11 said it expects continued volatility in the stock market, a trend that was dramatically highlighted by last week's significant fluctuations.
The brokerage expects that this churning will persist, especially as the market navigates the numerous uncertainties leading up to the U.S. presidential election.
These include economic indicators, Federal Reserve policy decisions, geopolitical tensions, and the unpredictable outcomes of the election itself.
The week ahead is filled with critical economic data releases, including reports on retail sales, industrial production, and inflation.
“The week ahead is jampacked with economic indicators that are likely to show that retail sales and industrial production weakened during July, as expected since employment was weak during the month,” said analysts at Yardeni Research.
Inflation, however, is expected to have edged higher during the same period, a development that might prompt Federal Reserve officials to push back against market expectations of a more substantial rate cut in September.
Yardeni suggests that if the Federal Reserve agrees with the assessment that adverse weather conditions depressed economic activity and employment in July, it could temper expectations for aggressive monetary easing.
This perspective may be reinforced by a potential downtick in jobless claims, which are set to be reported on Thursday.
Geopolitical developments continue to be a wild card, contributing to market instability. Escalating conflicts in Ukraine, potential missile threats from Iran, and tensions in the South China Sea are all factors that could exacerbate market volatility.
Yardeni highlights that the worsening geopolitical situation, particularly with Ukraine's military operations within Russian territory and rising tensions in the Middle East, adds another layer of unpredictability to the market.
Despite these risks,the brokerage remains cautiously optimistic that many of these uncertainties might resolve in a bullish manner by the November elections, potentially setting the stage for a year-end market rally.
The U.S. presidential election is another significant source of market uncertainty. PredictIt.com data reflects the unpredictability of the election outcome, and Yardeni notes that the outcome of congressional races is even harder to forecast.
However, the brokerage believes that the resolution of electoral uncertainties could have a positive impact on the market, contributing to a potential year-end rally.
Last week’s market action saw technical signals turn bullish rapidly, driven by a swift shift in investor sentiment from bullish to bearish. The Put/Call Ratio spiked to 0.97, indicating a heightened level of caution among investors.
Yardeni Research also flags an increase in insider buying during the recent market weakness.
As per Michael Brush, insider buying surged, particularly among executives and directors, with significant purchases in cyclical industries such as technology, construction, retail, and banking.
This uptick in insider activity is seen as a positive signal, suggesting that those closest to the companies believe in their long-term prospects despite short-term market turbulence