Market Research

Volatility hitting risk assets

RECAPPING LAST WEEK

A sharp three-day selloff hit risk assets as investors reassessed some of the potential economic
impacts from artificial intelligence adoption. The Nasdaq Composite index bounced back more
than 2% on Friday but still ended the week lower by 1.8%, while the S&P500 was flat. Smaller
companies and equal-weight indices continued to outperform as the S&P400 MidCap 400 jumped
4.4%, and the Russell 2000 and the S&P500 Equal Weight each gained more than 2%. Sector
performance favored cyclicals like basic materials (+4.5%), energy (+4.3%), and industrials
(+4.7%), while consumer staples soared 5% after Pepsico and Colgate-Palmolive saw positive
reactions to their earnings reports. Technology slid 2% and the software sub-index plunged 9%
after Anthropic unveiled an AI tool viewed as a potential replacement for widely used software
products in the legal and finance fields. Shares of Advanced Micro Devices sank midweek after
delivering a lackluster sales forecast, while Amazon tumbled on Friday after forecasting $200
billion in capital expenditures this year, a 50% increase YoY. Precious metals remained highly
volatile, with silver sinking to $63.90 and ultimately ending the week lower by 9% at $77. Gold
finished with a small gain after trading in a wide range. Fears of another “crypto winter” added to
investors’ anxiety after Bitcoin cratered by 30% to $60,000 before recovering about one-third of
the losses on Friday. Turning to economic news, the partial U.S. government shutdown ended on
Tuesday, and though it was brief, it pushed the release of January’s non-farm payrolls report to
February 11. Other data reflected a labor market that continues to soften. Private payrolls
increased by just 22,000 in January and wage growth slowed. Job openings in December fell to
the lowest level since 2020 while layoffs jumped above 100,000 last month. However, Amazon and
UPS accounted for most of the cuts, and although weekly jobless claims increased more than
expected in the last week of January, the underlying trend remained stable. U.S. Treasury yields
fell in reaction to the weaker jobs data while bond prices also caught a bid from investors seeking
shelter from volatility in risk assets. ISM Manufacturing PMI moved into expansion territory for the
first time in a year, but survey respondents were still wary of tariffs and rising raw material prices.
Consumer sentiment improved at the start of February as one-year inflation expectations
plummeted half a percentage point to 3.5%, the lowest level since January 2025. Overseas, OPEC
kept oil output unchanged for March amid Middle East tensions. Crude oil futures fell 3.4% in
volatile trading as news of talks to de-escalate friction between the U.S. and Iran were weighed
against incidents in the Strait of Hormuz. The European Central Bank left rates unchanged and
offered no insight into its next move. Inflation in the Eurozone dipped to 1.7% YoY in January while
core CPI edged down to 2.2%. The Bank of England also kept rates on hold in a closer than
expected vote, suggesting differing opinions on how much evidence is needed that inflation is
trending lower. The Reserve Bank of Australia became the first to raise rates this year, citing
persistent inflation pressures and a stronger economy running up against capacity constraints.

THE WEEK AHEAD

The volatility index (VIX) jumped to 23 last week before calming down on Friday and settling
below 18. The price action demonstrated how quickly short-term sentiment can shift when it
comes to themes like AI. Volatility seems likely to persist as investors attempt to sort through who
will be the winners and losers in a technology that many see as transformative. How and when
that happens and what disruptions occur along the way are still big unknowns. This week, the
delayed U.S. jobs report and Friday’s CPI release take center stage. Price pressures have become
more evident in recent PPI and PMI reports, so economists will be eager to see if higher costs are
being passed on to consumers. Retail sales from December will be released as that dataset is still
playing catch-up from last year’s government shutdown. Other events of note include 10- and 30-
year Treasury auctions. Earnings season is winding down, but given the recent carnage in
technology stocks, reports from software companies AppLovin and DataDog along with
networking giant Cisco Systems will garner attention. Overseas, Prime Minister Takaichi is
expected to secure a solid win for her ruling majority in Japan’s lower house elections over the
weekend. Preliminary GDP estimates for Q4 will be release in the UK and Eurozone. China’s
monthly inflation update rounds out the international calendar.

(Schwab)

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