Market Mayhem: Stocks Plunge and Volatility Surges Amid Political and Earnings Season Uncertainty

From highs to lows: analyzing the sudden stock market decline and rising volatility

• Stocks have fallen sharply as political uncertainty and earnings season jitters sparked increased market volatility.

• Global outages from a software update added to market chaos, affecting major companies and indices.

• Upcoming earnings reports from key companies will significantly influence market direction and investor sentiment.

After reaching a new closing high on Tuesday, the stock market has faced a significant downturn. Yesterday, the S&P 500 dropped by 0.8% while the Nasdaq Composite fell 0.7%. Among the eleven sectors in the S&P 500, only the energy sector avoided a decline. For the week, the S&P 500 is down 1.3%, and the Nasdaq has plunged 2.8%.

This broad decline affected even the indices that had been performing well. The Russell 2000 and Dow Jones Industrial Average had both shown strong gains recently but fell by 1.9% and 1.3%, respectively. Only three of the thirty stocks in the Dow closed in positive territory yesterday. Despite these drops, the Russell 2000 remains up 2.3% for the week, and the Dow is up 1.6%.

Prices down, volatility up

As equity prices fell, market volatility rose. While stock prices do not typically revert to a mean, volatility often does. For much of this year, the VIX has traded below its historical average of around 16. However, after a 10% jump yesterday, the VIX increased by 28% this week and is up another 2.5% in premarket trading at 16.31.

This rise in market volatility and the decline in stock prices are linked to political comments affecting foreign trade and nervousness about the upcoming earnings season. With U.S. elections approaching, volatility often increases. Additionally, the earnings season is intensifying, with high expectations. A major contributing factor to the market's turbulence was an overnight software update from CrowdStrike, which caused widespread global outages.

The outages impacted numerous companies, including McDonald's (MCD), United Airlines (UAL), banks and network broadcasters. In Europe, trade desks were affected, leading to a selloff in stocks. CrowdStrike (CRWD) has identified the issue and is pushing out a fix, but its shares are down about 10% in premarket trading.

Earnings season

Earnings reports are also influencing market movements. Netflix (NFLX) reported second-quarter results that exceeded revenue and earnings expectations, though its guidance was slightly lower than anticipated. As a result, Netflix shares have seen mixed trading in the premarket.

Travelers Companies (TRV) reported earnings that beat expectations despite slightly missing revenue estimates.

American Express (AXP) also posted better-than-expected second-quarter profits and raised its full-year forecasts, thanks to increased spending by affluent customers. Shares of American Express are up around 2.5% in premarket trading. Both Travelers and American Express are Dow stocks, and their performance could significantly impact the Dow Jones Industrial Average.

Next week, earnings season will gain momentum with major companies scheduled to report, including United Parcel Service (UPS), Spotify (SPOT), Alphabet (GOOG), Tesla (TSLA) and Visa (V) scheduled to report.

Today's monthly options expiration could lead to increased volatility. Based on premarket indications, the S&P 500 is expected to move by $16.50, according to tastytrade. The impact of the overnight software outage will be closely watched, especially at market open. Additionally, attention will be on volatility levels to see if they hold.

The political angles

There is also speculation that President Biden might announce his withdrawal from the presidential race as early as this weekend. The last incumbent to drop out was Lyndon Johnson in 1968. If Biden's announcement materializes, it could create an anomaly and significantly impact market perceptions.

As always, it is crucial to stick with your investing plans and long-term objectives amid market fluctuations.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan

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