The day after Thursday’s rollercoaster ride, Friday became a day of reckoning for Wall Street. The Dow closed up 493 points, or 1.08%, although it had been up as much as 800 points earlier in the session. The broader S&P 500 gained 0.98%, and the Nasdaq rose 0.88%. This morning recovery followed comments from New York Fed President John Williams expressing support for lower short-term interest rates, giving market participants hope for potentially cheaper borrowing as soon as December. Friday’s gains put an end to a volatile and highly confusing week for stock markets. What actually happened? At the start of Thursday, the falling market had two key questions it desperately awaited answers to: Would the artificial intelligence bubble soon collapse, and would the Fed take steps to ease monetary policy in December? Initially, it seemed traders had finally received the clear signals they had been seeking for so long: Nvidia reported phenomenal results on Wednesday evening, temporarily easing concerns about a potential slowdown in AI interest. And Thursday morning’s employment report showed a surprising rise in unemployment, as well as the fact that the US economy lost jobs in August (only the second time in three months). This led the market to assume that the Fed might be forced to cut rates as early as next month to stimulate the labor market. Phew. So, everything is fine? Not quite. At first, traders rejoiced on Thursday morning, sparking a massive rally in all three major indices. At one point, the Dow soared by over 700 points. However, by late morning, the rally began to fade, and sentiment—and the markets themselves—took a sharp downturn by midday. Traders realized that the answers they thought they had received were actually opening up more complex dilemmas. “People are trying to digest A.) What could be better than what Nvidia showed, and understanding that there is no significant risk premium at current highs, and B.) How the Fed can proceed with a cut if the employment data actually looks stronger than desired,” commented Michael Block, market strategist at Third Seven Capital. By the end of Thursday, it seemed as if nothing had changed: markets resumed their decline, pushing the S&P 500 more than 5% below its peak reached shortly before Halloween. The Dow, with a swing of 1100 points—its largest since the tariff-induced turbulence in April—closed Thursday down nearly 400 points. The S&P 500 fell by 1.6%, and the Nasdaq plunged by over 2%. Nvidia (NVDA), which was up as much as 5% earlier in the day, closed down 3%. And Bitcoin, which initially jumped above $92,000, fell to nearly $86,000 by the end of Thursday. Markets recovered on Friday, but Nvidia showed only flat performance. Bitcoin fell about 2% to levels not seen since April and risks having its worst month since 2022. So, what’s next? Nvidia’s quarterly earnings were so staggering that investors began to fear that the world’s most valuable company and the producer of the most scarce commodity in the tech sector—high-end AI chips—simply cannot sustain such a growth rate in the foreseeable future. Eventually, demand is bound to weaken. And even if that doesn’t happen soon, the AI market is not limited to just Nvidia—other, less powerful companies may still be overvalued. Perhaps traders feared that Nvidia’s report actually failed to answer any of their pressing questions after all. Investors also took a closer look at the rather ambiguous labor market report and realized that it might not be saying exactly what they initially thought: the headline figure showed much stronger hiring in September than expected, suggesting that the worst hiring slowdown observed in early summer was behind us. The rise in unemployment might have been due to more people returning to the labor market, resuming their job search after the summer lull. Williams’ glass seems half empty. But if the Fed takes a “glass half full” approach—especially after Wednesday’s release of the minutes from the last meeting revealed significant resistance to further rate cuts in December—then perhaps that December rate cut won’t happen at all. So here we are again on Friday, right back where we started. CNN’s Fear and Greed Index is in “Extreme Fear” mode and at its lowest level since—guess what?—April. The VIX volatility index briefly jumped to 27, its highest level since… do we even need to say it? Until investors receive clear answers to their questions, more market turbulence should be expected in the future. But given the release of delayed government data after the close, the conclusion of earnings season, and the fact that traders will soon be heading off for the holidays, it is unclear when those answers will arrive.
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