At times this week, not even a crystal ball into the economy would’ve helped foretell the stock market’s return. Red-hot consumer prices? Stocks rallied violently, adding 5 per cent in a flash.

In the end, though, the direction of the drift was all too predictable: downward, as a steady stream of inflationary sucker punches proved too much for bulls to withstand. As has been true all year, the week turned on a Friday, with concerns that price pressures are getting entrenched leaving the S&P 500 down 1.6 per cent over the five days, bringing losses on the year to almost 25 per cent.

Ironically, the seventh down week in nine for equities will be remembered for its single green day, Thursday, when investors somehow shook off another disastrous consumer price index and bid up nearly every company in the S&P 500. The rally was a nearly unprecedented reversal when measured by second-to-second volume -- and faded as quickly as it came, when a report Friday showed year-ahead inflation expectations rose among consumers for the first time in seven months.

“When you look at bear markets and economic turmoil, markets get a little bit irrational, and sometimes do the opposite of what you expect,” Jerry Braakman, chief investment officer and president of First American Trust, said in an interview. “People were buying on some of that news because they feel maybe a little bit safer and then the next day they wake up and realize oh wait, no, there’s still a lot of issues.”

Violent reversals this week -- up 2.6 per cent one day, down 2.4 per cent the next -- highlight the challenge of assessing reactions among investors whose obsession with inflation data and Federal Reserve reactions to them only seems to grow. The S&P 500 notched a 194-point down-to-up reversal on Thursday as data showed that core inflation posted a 6.6 per cent jump from a year ago, the largest in four decades. 

That it all fell apart on a Friday should surprise nobody. About 35 per cent of week-ending trading sessions have seen the index drop 1 per cent or more this year, according to Bespoke Investment Group. That’s a record going back to 1952 when the five-day trading week was instituted. The only other years that come near enough to the dreadfulness are other bad years in the market’s history: 1974, 2000, 2002, and 2008.

The Friday slump quieted market pundits who spent the previous day speculating on what caused such a jarring turnaround which, according to Sundial Capital Research data, was the fifth-biggest in the S&P 500’s history. It came after the gauge erased half its climb from 2020’s pandemic low, a hit to wealth that to some could have signaled that the Fed’s fight against inflation may be over at some point soon.  

Positioning among options traders may have played a part. Institutional investors loaded up on bearish options, spending a record US$10 billion on single-stock put contracts last week. The CPI print made many of those contracts available for immediate profit, prompting market dealers on the other side of the trade to buy stocks to keep their books neutral. 

 “When you’re in a confused market -- and we’re in a confused market with this volatility -- people hang their hat on everything,” said Rayna Lesser Hannaway, portfolio manager at Polen Capital Management. “These folks don’t have a crystal ball either, and that’s where I think there’s an opportunity for folks like us who can stay long-term focused when everyone is getting so short-term focused.”

All told, the S&P 500 had its 23rd instance of falling at least 1 per cent this year. The Dow Jones Industrial Average advanced 1.2 per cent in its second consecutive up week, while the yield on 10-year Treasuries posted an 11th straight week in the green, the longest stretch in 38 years. 

Concerted equity swings that saw 94 per cent of S&P 500 constituents advance on Thursday and 94 per cent of firms fall the next day pushed correlation measures to a level that’s 40 per cent above its historic readings at the start of earnings season. Adding to the sense of uneasiness among equity traders is a mixed set of quarterly results from big banks that kicked off the announcement season on Friday. The Cboe VIX Index traded above 30 for seven straight sessions, while a gauge of swings in the bond market, the MOVE Index, hovered near the highest level since March 2020.  

Developments in the U.K. added to the uncertainty, as U.K. Prime Minister Liz Truss promoted a new Chancellor of the Exchequer amid turmoil around her recently released economic plan. Her package of tax cuts has roiled markets as investors voiced worries about how the government would pay for the plans.

“At the end of the day, I think we have to realize that this is going to stick around a little bit longer,” Brian Belski, chief investment strategist at BMO, said in an interview. “I think it’s dangerous to call chicken little and say ‘The sky is falling, the sky is falling,’ and every CPI or PPI print, call for the top in inflation. I think that’s a dangerous game. But I do believe a year from now stocks will be higher, and I think a year from now inflation will be lower.”