Investors Play Defense While Volatility Stirs

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition includes "Three things to watch" while Thursdays feature a weekly section, "Crypto currents." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.

Defensive positioning showed up in the stock market late this week as consumer staples took the sector lead. Stocks like Walmart (WMT) and Berkshire Hathaway (BRK.B) gained. The defensive rotation is clear: Healthcare and consumer staples gained Thursday as technology fell. Broader participation hasn't collapsed, but mega-cap technology weakness has an outsized index impact. Investors might want to watch credit conditions, Treasury yields, Fed guidance, and semiconductor stabilization rather than chasing either the selloff or the defensive trade. Anthropic, Micron (MU), ASML (ASML) and Taiwan Semiconductor Manufacturing (TSM) all recently impressed with either results, guidance or both—but markets are questioning the cost of financing the AI buildout. That's been a common theme for about a year since "hyperscalers" began taking on debt to build their AI capabilities even as Treasury yields continued their long ascent, raising borrowing costs.

With Wednesday's results from Bank of America (BAC) and Morgan Stanley (MS), all the major Wall Street banks have now reported third quarter earnings. It was a mixed bag, as Bank of America and JPMorgan Chase (JPM) both missed analysts' expectations. Bond trading weakness last quarter hurt that side of the business for many big banks, which analysts had anticipated. Still, bank earnings reinforced ideas that the economy is on solid footing. Loan growth looked solid and credit concerns didn't surface. Big banks didn't add much protection against possible credit defaults, a sign they don't anticipate turbulence despite current high borrowing costs. Investment banking suffered as some prominent firms postponed initial public offerings (IPO) in the tighter financial environment. That didn't prevent Goldman Sachs (GS) from offering positive comments on its earnings call. "Capital markets activity is still good," CEO David Solomon said. "I think we're still in a very good capital markets environment. The IPO market is still in pretty good shape."

Investment flows, leverage, sentiment... nearly every indicator points to improved investor demand and participation in crypto markets, as reflected in bitcoin's rally of about 40% from the bear market lows hit in June, said Jim Ferraioli, director of digital currencies research and strategy at the Schwab Center for Financial Research. The takeaway is clear: "Crypto winter" is over. With the extreme fear and aggressive deleveraging of the bear market having passed, bitcoin and other crypto assets are likely to be more affected by the macro environment than earlier in the year, trading more like low correlation risk assets, Ferraioli said. This may leave them more exposed to risk-off episodes. Exhibit A is bitcoin's drop in reaction to Wednesday's hotter-than-expected inflation data. The prospect of rising interest rates ahead could create headwinds for crypto in the months ahead.

After a drowsy start to autumn, volatility awoke this week thanks to hot U.S. inflation readings. Geopolitics also played a role as Ukraine and Russia traded attacks and Iran sank ships in the Hormuz Strait, though gulf oil exports proved resilient. WTI crude stayed near recent highs around $96 per barrel early today, and companies still wrestle with high diesel costs. Near-term catalysts could keep volatility elevated. The Cboe Volatility Index (VIX) popped from below 15 last Friday to 17.50 Thursday. An approach to near 20 could signal more pressure on stocks, if history is any indication. Institutional investors appear to be buying downside protection. The S&P 500^® Index remains above key technical support around 7,700, with 7,500 a larger downside risk around monthly options expiration. A level to watch in the S&P 500 is the 50-day moving average near 7,700, which held so far this week despite tests. One close under that wouldn't necessarily suggest heavier losses. A series of such closes might be more technically damaging. 

One impact of the rising-yield environment is renewed interest in the relative safety of cash. In the week ended October 7, investors placed a net $166.4 billion into money market funds, per a Bank of America report citing EPFR Global data. That marked the biggest single-week inflow since the early COVID days of April 2020. Bond funds took in $33.8 billion over the same week, while equity funds attracted $12.4 billion. Total money market assets have surged from roughly $5 trillion in 2023 to about $8 trillion, BofA noted. With the Federal Reserve more hawkish than expected and inflation still running above the central bank's target, the appeal of cash could continue. That said, utilities and staples—both sometimes called "bond proxies"—showed some life earlier this month. If that sort of trading continues, it could indicate some market participants trying to pinpoint a possible bottom in the slumping Treasury market.