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Volatility Is Key Word With Markets Back on Upswing

With markets again on the upswing, this week on Wall Street so far has been defined by its volatility.

MANHATTAN (CN) — Markets continued their volatile sojourn Wednesday, making slight gains after falling on Tuesday.

Wall Street began the week with a huge rally, with the Dow Jones Industrial Average gaining 900 points on Monday, only to fall back to Earth on Tuesday. But on Wednesday markets again pointed up, with the Dow gaining 300 points at the open. The S&P 500 and Nasdaq, which have had similar ups and downs this week, began Wednesday with a 1% and 0.5% increase, respectively.

The volatility index (VIX), otherwise known as the “fear index,” spiked in mid-March to historic levels, but it has been dropping ever since. The VIX is still far higher, however, than its 19.3 long-run average — a trend some analysts say reflects the fragility of the current equities market.

“[Tuesday’s] reversal for U.S. stocks is a good reminder that volatility remains elevated well beyond normal,” Nicholas Colas and Jessica Rabe of DataTrek wrote in an investor’s note.

“It is easy to see how a VIX at 28-30 could be the new normal for a while, and history clearly says US stocks will not move noticeably higher or lower during that time,” they continued. “We remain optimistic on U.S. large caps but also understand that further rallies need robust answers to some difficult questions.”

DataTrek noted that actions by the Federal Reserve and various stimulus programs have helped reduce volatility overall and allowed rallies to occur, even if corporate earnings are weak. 

Most of the economic data coming out recently has been bad, but expected. On Tuesday, the Congressional Budget Office forecast annualized gross domestic product to drop by 38%, with an 11% decline in GDP during the second quarter. The CBO expects the economy to begin expanding again during the second half of 2020.

In the world of retail, leading companies have released earnings showing predictable drops in sales, though a spike in online sales shows promise.

Much like its competitor Home Depot reported on Tuesday, Lowe’s reported a $2 billion increase in its sales, from $17.7 billion during the first quarter of 2019 to 19.7 billion during the first quarter of 2020. During that same period, however, the home-improvement store’s net earnings increased from $1 billion to $1.3 billion.

Lowe’s has raised $4 billion in unsecured notes to prepare for a prolonged economic downturn, and CEO Marvin Ellison credited the company’s 80% increase in online sales for much of its success.

Digital sales also helped Target, as the retailer reported a 141% increase year over year in online sales for the quarter. Target said digital sales increased every month of the lockdown, from 33% in February to 282% in April.

The huge bump in digital sales accounted for most of the 10.8% in the Minneapolis-based company’s increase in comparable sales year over year. Target’s total revenue also increased 11%, from $17 billion in Q1 2019 to nearly $20 billion in Q1 2020. 

Urban Outfitters, which released its earnings after U.S. markets closed on Tuesday, reported a drop across its brands in net sales, from $864 million during the first three months of 2019 to $588 million during 2020’s first three months.

The company has started to perform impairment assessments of its assets to see if it can shed any dead weight. “I’m confident our proven ability to execute our multi-channel, multi-brand, and multi-category strategy will ensure our future success,” CEO Richard Hayne said during the company’s presentation.

More than 4.9 million people worldwide have been confirmed infected by Covid-19, according to data from researchers at Johns Hopkins University, and roughly 323,000 have died. In the United States, more than 1.5 million people have contracted the novel coronavirus and more than 91,000 have died.

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