INVESTORS BEWARE: SUMMER MADNESS IS HERE / THE ECONOMIST

Investors beware: summer madness is here

This year’s hottest months are shaping up to be especially wild

So much of finance is automated these days you can forget quite how strongly markets echo human rhythms. 

Yet stock exchanges still ring their opening and closing bells at either end of the working day designed a century ago in Henry Ford’s car factory; the more civilised of them even break for an hour at lunch. 

The foreign-exchange market notionally operates around the clock, but it is a brave soul who attempts a big order during London’s early hours, before the City is open for business. 

And it is not just daily routines that matter—seasonal ones do, too. 

Spare a thought, then, for the 20-somethings left to run the northern hemisphere’s trading desks over the next few weeks, while their bosses doze on a beach.

Possibly for this reason, markets are often more jittery than usual during the summer months. 

Last year, for example, it was in August that American share prices began their final protracted fall before a storming bull run that took them to new all-time highs. 

That may be down to liquidity, which, with many investors also off reclining in the sun, tends to be slightly thinner during the holiday season than in the rest of the year. 

It may also be that the lack of veterans on banks’ trading floors allows panic to set in more easily. 

Prices can swing a lot further before someone musters the courage to push back.

This summer has already tested nerves. 

After months of rising at a breakneck pace, stockmarkets around the world have been knocked off-kilter. 

On July 24th America’s benchmark S&P 500 index had its worst session since December 2022, falling by 2.3%. 

Equities elsewhere followed suit the next day. 

Wall Street’s “fear gauge”, the VIX index, which measures expected stockmarket volatility through the prices traders pay to protect themselves from it, has leapt up after months in the doldrums. 

Meanwhile, the Japanese yen, an erstwhile safe-haven currency, has rallied at close to its fastest rate in two decades. 

It is almost enough to rouse a senior trader from his sunbed.

What is more, the rumpus may be only getting started. 

One reason is that stockmarkets have become eye-poppingly concentrated. 

America’s now constitutes nearly two-thirds of global equity value, and increasingly revolves around the fortunes of a small cluster of firms. 

The S&P 500’s big drop came just after Alphabet and Tesla reported their second-quarter earnings, and days before Amazon, Apple, Meta and Microsoft were due to follow suit. 

In other words, a handful of tech giants worth a collective $11trn, or a quarter of the S&P 500’s total value, released their earnings in a little over a week. 

So much hinges on investors’ attitudes towards such companies that it is easy to envisage further ructions ahead.

At the same time, those attitudes appear to be shifting from euphoria to something a little more mercurial. 

The share price of Nvidia, the darling of the previous bull run, has fallen by 14% since a peak in June, while gyrating madly along the way. 

On July 30th it plunged by 7%, then rocketed by 13% on July 31st. 

Alphabet lost 5% of its market value the day after its earnings report, despite beating analysts’ revenue expectations. 

Tesla’s results, which undershot expectations, led to a one-day drop of 12%.

Such big moves are not solely down to jumpy traders. 

They are also a result of the extreme positions investors have taken. 

Analysts at the Royal Bank of Canada note that asset managers have bet more aggressively on futures contracts linked to the NASDAQ 100, an index dominated by big-tech firms, than at almost any other time in the past. 

With these bets already placed, few buyers remain to take prices higher; any change in sentiment can trigger a crash. 

And it is not just the tech giants. 

Positioning in S&P 500 futures, as well as those for America’s stockmarket more broadly, is more bullish—and hence more vulnerable to a reversal—than it has been since the Royal Bank of Canada began tracking it in 2010.

The consequence is that an awful lot rides on how quickly the Federal Reserve can cut rates, giving earnings a boost that has already been priced in. 

Following the rate-setters’ latest get-together on July 31st, such a move seems imminent. 

“A reduction...could be on the table as soon as the next meeting in September,” said Jerome Powell, the Fed’s chairman. 

Even this, though, was already seen by investors as a sure thing. 

Any news suggesting it might not be, or that further cuts might not swiftly follow, would be just the sort of catalyst to make an already wild summer wilder still.