- US stocks just had their best week in a year, but don't expect the upbeat trend to last.
- The market could face wild swings into year-end due to uncertainty over interest rates, said CIBC Private Wealth's David Donabedian.
The US stocks just had their best week in a year. But don't take that to mean a smooth ride ahead, according to one expert.
Persistent uncertainty about the future direction of interest rates will fuel increased volatility in equities in the coming months, according to David Donabedian, chief investment officer of CIBC Private Wealth US, which oversees more than $100 billion in assets.
The benchmark S&P 500 index of US shares jumped 5.85% last week, after the Federal Reserve left interest rates unchanged for the second straight policy meeting. Softer-than-expected jobs data also fueled expectations the central bank will refrain from further increases in borrowing costs as the economy starts slowing.
The improved sentiment in equities saw the market's so-called fear gauge, the CBOE Volatility Index or VIX, plunge the most since 2021 last week.
But the decline in the uncertainty gauge could prove temporary, going by Donabedian's outlook.
"While last week was a good one for the equity market, it will not always be that easy. We expect the rest of the year to be volatile, going through manic depressive swings based on where interest rates are headed," he said in emailed comments.
The main reason for such volatility would be the unresolved uncertainty over interest rates, he said. While it hasn't raised borrowing costs since July, the central bank is still maintaining its stance that rates will remain higher for longer, given the lingering threat of inflation.
"Looking ahead, however, there may be a reality check ahead on the Fed. If bond yields continue to fall, will a rate hike be back on the table? We need to keep an eye on this," Donabedian said.
US stocks have been taking cues in recent months from the Treasury bond market, where benchmark yields hit 16-year highs above 5% in late October. Higher yields on government bonds, which are considered a safer form of investment, tend to lure investors away from riskier assets such as equities.
The Fed has raised its benchmark rate by more than 500 basis points since early 2022.