Summary

The major domestic equity indexes stocks ended a wild week with a burst of buying, pushing the S&P 500 up 1.5 percent on Friday, but still recorded their worst week in two years, and investors braced for more volatile trading days ahead.

The sharp falls of the week confirmed the market was in a correction, down more than 10 percent from a Jan. 26 record high, and throwing the nearly nine-year bull market off course. The newly volatile market was shaken in part by rising bond yields, which led stock investors to rethink their positions after months of steady gains.

The S&P 500 ended the week nearly 9 percent below the all-time high set just two weeks ago.

On Friday alone, the S&P 500 swung from gains of up to 2.2 percent to declines of 1.9 percent, echoing the big swings of the past week. The Dow moved in a range of more than 1,000 points, a more modest change than on Monday when the Dow fell as much as nearly 1,600 points.

The technology sector was the best-performing group on Friday, with Microsoft, Alphabet and Facebook providing the largest individual boosts to the S&P 500. Energy was the lone major S&P sector to end negative as oil prices tumbled.

The benchmark S&P 500 fell 5.2 percent for the week, its biggest weekly percentage drop since January 2016. For the week, the sector that got hammered the most was energy. To date, 96 S&P 500 stocks are down 20 percent or more from their own one-year highs, according to Thomson Reuters data.

The sharp selloff in recent days was kicked off by concerns over rising inflation and bond yields, sparked by last week’s January U.S. jobs report.

Equities for years have looked relatively attractive compared to the low yields offered by bonds, but the rise in Treasury yields has diminished the allure of stocks, especially with stock valuations at historically expensive levels.

The yield on benchmark 10-year Treasury hovered around 2.85 percent after touching a four-year peak of 2.885 percent on Monday.

Fund investors sucked $23.9 billion out of the stock market in the latest week, marking the largest withdrawals from those funds on record, but bulls were still encouraged by strength in the global economy and solid U.S. corporate earnings.

Also, the percentage of Main Street investors expecting stocks to fall reached a three-month high in the American Association of Individual Investors’ weekly survey.

During Friday’s session, the S&P 500 briefly broke below its 200-day moving average, a closely watched technical level, before rising.

The S&P 500 lost $2.49 trillion in market value from Jan. 26 through Thursday, according to S&P Dow Jones Indices.

Volatility remained high compared to recent months. The market’s main gauge of volatility, the CBOE Volatility Index fell 4.4 to 29.06 on Friday but was still nearly three times the average level of the past year.

Approximately 12 billion shares changed hands on the major domestic equity exchanges on Friday, a number that was well above the 8.5 billion share daily average over the past 20 sessions. It was the first-time weekly volume eclipsed 50 billion since August 2015.

Crude Falls

Oil prices slid more than 3 percent on Friday as U.S. futures fell below $60 a barrel for the first time since December on renewed concerns about rising crude supplies.

U.S. West Texas Intermediate (WTI)  and Brent crude futures have slid more than 11 percent from this year’s peak in late January. Brent fell nearly 9 percent for the week while U.S. crude dropped 10 percent, the steepest weekly declines since January 2016.

Futures posted a sixth straight day of losses, wiping away the year’s gains in a string of high-volume trading sessions, pressured by stronger-than-expected supply figures and a surprising ramp-up of the North Sea Forties Pipeline, which shut earlier in the week.

WTI crude settled down $1.95, or 3.2 percent, to $59.20, the lowest settlement since Dec. 22. The session low for U.S. crude was $58.07. More than 845,000 contracts changed hands in another above-average day for trading volumes.

Brent futures fell $2.02 a barrel, or 3.1 percent, to $62.79 a barrel, its lowest settlement since Dec. 13.

Oil services company Baker Hughes said total U.S. onshore rigs rose by 26 to 791, highest since January 2017. Drillers have added rigs as oil prices rallied through mid-January.

Oil is inversely correlated with the dollar, which has strengthened as equities markets slid.

Crude volumes in the North Sea Forties pipeline continued to ramp up faster than expected following a restart, a trade source told Reuters.

Investors were already worried that rising U.S. crude production will overwhelm efforts by OPEC and other producing nations to cut supply. U.S. output rose to 10.25 million bpd in the most recent weekly figures, which if confirmed would represent a record. The Baker Hughes figures should mean still more supply in coming months.

On Thursday, OPEC member Iran announced plans to boost production within the next four years by at least 700,000 barrels a day.

Will Inflation Move Higher

The inflation, considered benign until now, might be raising its ugly head, which one key reason for the recent market volatility. There will be some evidence as to where we stand as we digest two important readings on inflation next week that could help determine whether the stock market begins to settle or if another bout of volatility is in store.

If the January’s consumer price index, due out next Wednesday, and the producer price index, which will be released the following day, come in higher than the market anticipates, brace yourself for more selling and gyrations for stocks.

Consumer prices rose 2.1 percent year-on-year in December and is forecast to stay around that pace this month.

The equity market has become highly sensitive to inflation this month. A selloff in U.S. stocks earlier this week was in large part sparked by the February 2, monthly employment report which showed the largest year-on-year increase in average hourly earnings since June 2009.

In addition, the new tax program will likely stimulate economic growth. However the prospect of more government borrowing to fund a widening fiscal deficit, and rising wages, has pushed the benchmark Treasury yields to near four-year highs.

The rise in wage inflation pushed yields on the benchmark 10-year Treasury note closer to the 3.0 percent mark last seen four years ago, denting the attractiveness of equities, and unnerving investors fearful inflation will force the Fed to raise short term interest rates at a faster pace than is currently priced into the market.

The current earnings yield for the S&P 500 index companies stands at 5.4 percent, below the 6.4 percent average of the past 20 years. As bond yields rise the spread between the two narrows, prompting asset allocation changes between equities and fixed income.

On Thursday, New York Fed President William Dudley said the central bank’s forecast of three rate hikes still seemed a “very reasonable projection” but added there was a potential for more, should the economy look stronger.

Traders are currently putting the chances of a 25-basis point hike by the Fed at its March meeting at 84.5 percent, according to Thomson Reuters data.

Benchmark 10-year note yields week rose this past week to a four-year high of 2.885 percent. On Friday, benchmark 10-year fell 1/32 in price to yield 2.853 percent.

While many analysts were predicting bond yields to rise this year as global economies improve, the suddenness of the move was a large factor in the recent stock market selloff.

The 10-day correlation between the S&P 500 index and yields on the 10-year note was at a negative 0.79, as of late Thursday.

On Friday, both the Dow Jones Industrial Average and S&P 500 index closed out their worst two-week performance since August 2011.

The fragile investor psyche is likely to lead to continued volatility coming off a week that saw the Dow suffer its largest intraday index point decline in history on Monday, nearly 1,600 points. The Dow currently has an average intraday swing over the past 50 days of 265.76 points, the highest since March 2016.

However, yields are not at levels that should be alarming to investors, and in fact are at levels that signal a healthier global economy, and the performance of some stocks this week points to a belief the consumer is also getting healthier. The average yield on the 10-year Treasury note over the past 30 years is 4.834 percent, still well above current levels.