U.S. stocks enjoyed one of their strongest days of the year as Wall Street breathed a sigh of relief following a better-than-expected economic report. On Tuesday, the S&P 500 surged 1.7% after the government revealed that wholesale inflation had eased more than anticipated last month. The Dow Jones Industrial Average rose by 1%, while the Nasdaq composite soared 2.4%.

On Wednesday:
The S&P 500 rose 20.78 points, or 0.4%, to 5,455.21.

The Dow Jones Industrial Average rose 242.75 points, or 0.6%, to 40,008.39.

The Nasdaq composite rose 4.99 points, or less than 0.1%, to 17,192.60.

The Russell 2000 index of smaller companies fell 10.87 points, or 0.5%, to 2,084.32.


For the week:
The S&P 500 is up 111.05 points, or 2.1%.

The Dow is up 510.85 points, or 1.3%.

The Nasdaq is up 447.30 points, or 2.7%.

The Russell 2000 is up 3.40 points, or 0.2%.


For the year:
The S&P 500 is up 685.38 points, or 14.4%.

The Dow is up 2,318.85 points, or 6.2%.

The Nasdaq is up 2,181.25 points, or 14.5%.

The Russell 2000 is up 57.25 points, or 2.8%.
 

Fear fades in US stocks

The initial panic from last week's U.S. stock market volatility seems to have subsided, yet historical trends suggest that market unease could linger for months. The Cboe Volatility Index (^VIX), a key measure of investor anxiety, has quickly declined from its four-year peak reached last week. Following the market's steepest drop of the year, the S&P 500 (^GSPC) has rebounded by 3% from its recent lows, while the VIX now stands around 20, significantly lower than its August 5 close of 38.57.

Investors pointed to the rapid dissipation of market anxiety as further evidence that last week's meltdown was fueled by the unwinding of massive leveraged positions, including yen-funded carry trades, rather than longer-term concerns such as global growth.
 

A big increase in volatility

Investors have plenty of reasons to stay cautious in the coming months. Many are awaiting key U.S. economic data, including a consumer price report later this week, to gauge whether the economy is simply slowing down or facing a deeper downturn.

Political uncertainties, from the upcoming U.S. election in November to potential escalations in the Middle East, are also keeping investors on edge.

Nicholas Colas, co-founder of DataTrek Research, is closely monitoring whether the VIX can stay below its long-term average of 19.5 to assess if calm is truly returning to the markets.

"Until the VIX remains below 19.5 for several days, we should acknowledge the ongoing market uncertainty and be cautious about trying to time market bottoms or pick individual stocks," he advised.

CPI data due on Aug. 14 and earnings from Walmart and other retailers this week could be crucial in determining investor sentiment, said Mark Hackett, chief of investment research at Nationwide, in a recent note.
 

"It wouldn't be surprising to see potentially overblown reactions to this week's CPI number, retailer earnings and retail sales from investors given the heightened emotional responses in the market recently."

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.