"The most turbulent week since April" has ended, and U.S. stocks continue to rise, but no longer in calm

"The most turbulent week since April" has ended, and the prolonged calm in the market is beginning to unravel.

This week's rekindling of trade conflicts, the emergence of credit risks in U.S. regional banks, and concerns over the overvaluation of artificial intelligence stocks have collectively triggered the most severe market turbulence in U.S. stocks since April. The intraday gain of the S&P 500 index has also surpassed 2% for the first time since April.

(This week, the intraday gain of the S&P 500 index has surpassed 2% for the first time since April)

Despite a low open and a subsequent rise in the three major U.S. stock indices on Friday, the week still accumulated a rebound of at least over 1%. However, investors flocked to safe-haven assets such as government bonds and gold, while high-yield bond funds experienced significant capital outflows, and previously hot risk trades like cryptocurrencies also lost momentum.

Various signs indicate that the market tone is shifting. Although not everyone believes this is the beginning of a bear market, the subtle changes in investor sentiment, the re-examination of credit risks, and the cooling of speculative trading are prompting large fund managers to adopt a more cautious and defensive stance.

After months of one-sided gains, the market is beginning to relearn how to coexist with volatility.

Alarm Bells After Trillion-Dollar Risk Accumulation

This week, the stock market still closed with decent gains, as U.S. stocks continued a bull market that has accumulated a value increase of $28 trillion after Trump retreated from tariff threats.

(This week, the performance of U.S. stock benchmark indices)

However, the sustained six-day volatility across asset classes indicates a deeper anxiety is spreading: credit fragility.

Wall Street Insights mentioned that the collapse of auto suppliers First Brands Group and auto loan institution Tricolor Holdings has reignited long-dormant concerns about credit losses.

According to media reports, advisors for First Brands admitted in court last Thursday that they could not track $1.9 billion in assets that should have served as collateral for creditors, with only $12 million left in the company's bank account.

This week, Wall Street Insights reported that the impairment losses related to fraud disclosed by Zions Bancorp and Western Alliance wiped out over $100 billion in market value for U.S. bank stocks in a single day, raising concerns about more widespread loan pressures.

These events directly impacted the relevant sectors. The S&P Regional Banking Select Industry Index has fallen for the fourth consecutive week.

Previously buoyed by the AI boom and resilient consumer data, investors were dismissive of all risks, from government shutdowns to overvaluations, leading to positions that appeared quite aggressive According to data from Société Générale, as of the end of August, the allocation ratio of risk assets such as stocks and credit in the tracked portfolios has risen to 67%, approaching peak levels.

Risk Aversion Prevails, VIX Index Soars

One of the most notable features this week is the sharp return of market volatility.

The VIX index, which measures market panic, briefly rose to 28.99, reaching the highest intraday level since late April. The VVIX index, which tracks the speed of changes in investor sentiment, also hit a high since April. This indicates that behind seemingly robust stock indices, the inherent stability of the market is weakening.

(The VIX soared to nearly 29 on Friday before retreating, but still accumulated gains this week)

At the same time, according to global market data from the Chicago Mercantile Exchange, investors are buying options betting that the VIX index may soar to 47.5 and 50, and an indicator measuring demand for tail risk hedging has also surged to a six-month high.

Jordan Rizzuto, Chief Investment Officer of GammaRoad Capital, stated:

The list of concerns is actually increasing, and in this environment, we should expect higher volatility.

High-Risk Assets Retreat, Digital Currencies Hit Hardest

As risk aversion heats up, previously sought-after high-risk assets are beginning to retreat.

The digital currency market has become a hard-hit area, with Bitcoin dropping to its lowest point since July on Friday, accumulating a decline of about 8.7% this week, marking the worst weekly performance since February.

Notably, unlike previous sell-offs where retail investors would "buy the dip," the market's reaction this time has been muted, suggesting that "enthusiasm is waning, and risk control awareness is increasing." This cooling trend may not be limited to the token space.

According to EPFR Global data, over $3 billion has flowed out of high-yield bond funds in the week ending Wednesday. Although the spread on high-yield corporate bonds remains at historically low levels, it has widened by 0.25 percentage points to 2.92 percentage points this month.

In quantitative portfolios, strategies to avoid credit risk have also regained favor. According to Evercore ISI, a hedge trade that shorts highly leveraged companies while going long on low-debt peers has once again yielded strong returns, echoing patterns seen before the peak of the internet bubble.

Fund Managers Adjust Strategies Towards Credit Risk Defense

John Roe, head of multi-asset funds at Legal & General, which manages $1.5 trillion in assets, stated that his team has decided to reduce risk exposure and has turned to shorting stocks on Wednesday, citing an increasing disconnect between investor positioning and fundamentals He added that the company had previously underweighted credit assets and viewed the bankruptcies of Tricolor and First Brands as potential warning signs of broader pressures, especially among low-income borrowers.

Ulrich Urbahn, Head of Multi-Asset Strategy and Research at Berenberg, also expressed a similar view. He stated:

I believe we are entering a typical credit downturn cycle, which is not catastrophic, but it marks an increasing risk of a turning point in the broader environment.

In the past two weeks, he has increased stock hedges, reducing stock exposure by about 10 percentage points, and sold call options on the S&P 500 index, to protect strong gains year-to-date.

Not everyone believes the market has reached a turning point

Despite rising concerns, not everyone believes the market has reached a decisive turning point. Some analysts argue that the recent turmoil is more an overreaction to isolated events rather than a signal of systemic issues.

Garrett Melson, Portfolio Strategist at Natixis, stated that the sell-off related to Zions and Western Alliance may reflect market positioning and sentiment more than deep-seated credit pressures. He believes

The fundamentals of the credit market remain strong, and our team has recently adjusted stock positioning from slightly underweight back to neutral.

Matt Wittmer, Portfolio Manager at Allspring Global Investments, also believes that the recent volatility after a rapid and significant market rise is "healthy," indicating that the market is not "overly ahead."

His firm continues to overweight financial stocks like JP Morgan and Citigroup, maintaining positions amid recent sharp fluctuations.

Risk Warning and Disclaimer

Markets are risky, and investments should be made with caution. This article does not constitute personal investment advice and does not take into account individual users' specific investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk