"The most turbulent week since April has ended; U.S. stocks continue to rise, but the calm is gone."

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"The most turbulent week since April" has ended, and the market's long-standing calm is unraveling.

The renewed outbreak of trade conflicts this week, the emergence of credit risks at US regional banks, and concerns over excessive valuations of AI stocks together triggered the most dramatic market volatility in US stocks since April. The S&P 500's intraday gains even surpassed 2% for the first time since April.

(The S&P 500's intraday gains this week surpassed 2% for the first time since April)

Although on Friday, the three major US stock indices opened low and closed high, rebounding by at least 1% for the week, investors flocked to safe-haven assets such as government bonds and gold, high-yield bond funds saw large-scale capital outflows, and the previously booming risk trades such as cryptocurrencies also lost momentum.

Various signs suggest that the market tone is changing. Although not everyone sees this as the beginning of a bear market, subtle shifts in investor sentiment, a reassessment of credit risk, and a cooling of speculative trades are prompting large fund managers to adopt a more cautious and defensive stance.

After months of unilateral gains, the market is starting to relearn how to coexist with volatility.

Alarm Bells After Trillions of Risk Accumulation

The stock market still ended this week with decent gains, and after Trump backed down from tariff threats, US stocks on Friday extended a bull market that has seen a $28 trillion gain.

(US stock benchmark index performance this week)

But six days of volatility across asset classes reveal a deeper anxiety is spreading: credit fragility.

Wallstreetcn mentions that the collapse of auto-parts supplier First Brands Group and auto loan company Tricolor Holdings first reignited long-dormant concerns over credit losses.

According to media reports, last Thursday First Brands' advisers admitted in court that they could not trace $1.9 billion in assets that should have been collateral for creditors, and the company's bank accounts had only $12 million left.

This week Wallstreetcn reported that impairment losses related to fraud disclosed by Zions Bancorp and Western Alliance wiped out more than $100 billion of US bank stocks' market value in a single day, sparking broader fears of loan stress.

These events hit the relevant sectors directly. The S&P Regional Banks Select Industry Index fell for the fourth straight week.

Previously, buoyed by the AI boom and resilient consumer data, investors shrugged off all risks from government shutdowns to overvaluation, resulting in rather aggressive positioning.

According to data from Societe Generale, as of the end of August, the allocation proportion of risk assets such as stocks and credit in tracked portfolios had risen to 67%, near peak levels.

Risk Aversion Prevails, VIX Soars

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

The VIX index, which measures market panic, once soared to 28.99, the highest intraday level since late April. The VVIX index, which tracks the rate of change in investor sentiment, also hit its highest point since April. This shows that behind the seemingly firm stock indices, the market's internal stability is weakening.

(VIX spiked close to 29 on Friday before retreating, but still rose for the week)

Meanwhile, according to CME Group data, investors are buying options betting the VIX index might surge to 47.5 and 50, and a measure of demand for tail risk hedging jumped to a six-month high.

GammaRoad Capital CIO Jordan Rizzuto said:

The list of worries is actually growing. In this environment, we should expect higher volatility.

High-Risk Asset Retreat, Cryptocurrency Bears the Brunt

As risk aversion rises, previously sought-after high-risk assets are starting to retreat.

The cryptocurrency market has been hit hardest: Bitcoin fell to its lowest level since July on Friday, down about 8.7% for the week—the worst weekly performance since February.

Notably, unlike in past slumps when retail investors rushed in to "bottom fish," the market reaction this time has been tepid, suggesting "the frenzy is fading, and risk control awareness is strengthening." This cooling trend may not be limited to the token sector.

According to EPFR Global, over $3 billion flowed out of high-yield bond funds in the week ending Wednesday. Although high-yield corporate bond spreads remain near historic lows, they have widened by 0.25 percentage points this month to 2.92%.

In quantitative portfolios, strategies to avoid credit risk are back in favor. According to Evercore ISI, a hedge trade of shorting highly-levered companies and going long their low-leverage peers is once again generating strong returns, reminiscent of patterns at the peak of the internet bubble.

Fund Managers Adjust Tactics Toward Credit Risk Defense

John Roe, head of multi-asset funds at Legal & General, which manages $1.5 trillion, said his team has decided to reduce risk exposure and turned short on stocks on Wednesday, citing a growing disconnect between investor positioning and fundamentals.

He added that the firm had already underweighted credit assets and regards the collapse of Tricolor and First Brands as a potential warning signal of broader pressure, especially among low-income borrowers.

Berenberg's Head of Multi Asset Strategy and Research, Ulrich Urbahn, also expressed a similar view. He said:

I believe we are entering a typical credit downturn cycle. This is not catastrophic, but it marks a rising risk of a turning point for the broader environment.

In the past two weeks, he increased stock hedges, lowered equity exposure by about 10 percentage points, and sold S&P 500 call options, to protect strong gains so far this year.

Not Everyone Believes the Market Has Turned

Despite rising concern, not everyone thinks the market has reached a decisive turning point. Some analysts believe recent turbulence is more of an overreaction to isolated events rather than a sign of systemic problems.

Garrett Melson, portfolio strategist at Natixis, said the selling related to Zions and Western Alliance may reflect market positioning and sentiment more than deep credit stress. He believes

The fundamentals of the credit market remain strong, and our team recently adjusted our equity position from slightly underweight to neutral.

Matt Wittmer, portfolio manager at Allspring Global Investments, also believes that after a rapid and substantial market rise, recent volatility is "healthy" and indicates the market is not "getting ahead of itself".

His firm continues to overweight financials such as JPMorgan Chase and Citigroup, and has maintained positions during the recent sharp volatility.

Risk Warning and DisclaimerThe market carries risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the individual investment objectives, financial situation, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article are appropriate to their circumstances. Investment based on this information is at your own risk. ```