Macro Moments Weekly: Market Dog Days—all bark, no bite?

We are in the ‘dog days’ of summer: Those sultry days, which in ancient Greece were associated with heat, drought, mad dogs and bad luck. This past week, we have contended with a resumption of fighting in the Gulf, a brutal bear market in South Korea, the peak of the corporate earnings reporting season and central bank comments on interest rates and inflation.

The resumption of hostilities in the Gulf surprised no one. The market has begun to expect a long-term lack of resolution, and although the price of oil bounced, it was relatively mild and reversed. A key theme this year has been geopolitics ain’t what it used to be.

But alongside this, the July Federal Reserve policy meeting saw a 9-3 split vote amongst the members to keep rates steady. Traders had worried about a surprise hike and merely moved their expectations, claiming the market should prepare for a rate rise in September. Long rates rose and the equity and bond markets braced themselves for what’s to come.

Yet, this week the S&P 500 Equal Weight Index (which gives constituents the same weight rather than weighing them by market capitalisation) hit a new high. So, the majority of stocks think this is good news—or just do not care. Such a paradox is not unusual; the first rate rise often is a signal not of inflation, but of growth. The United Kingdom’s Monetary Policy Committee voted 6-3 to keep rates on hold, even though the central prognosis is for less growth and probably a decent inflation outcome.

Where the dog has barked is in South Korea. It is less a market-move, but more of a domination by two stocks, SK Hynix and Samsung. The press has been enjoying printing tales of woe from retail investors now carrying large losses, rather than what the valuation of these stocks now could be.

The confirmation of the buildout of data centres by the hyper-scalers (and others) has come thick and fast. These stocks are still backed up by fundamentals. Some volatility should not be a surprise, and the market is now looking oversold. How long that lasts should be the question, and an opportunity beckons.  

The reporting season in Europe has been compelling. Overall, it is another good one. But only those stocks that have materially beat consensus expectations have seen a positive stock reaction—that’s about 5% of the market. The rest have either been flat or if they have missed expectations, even partially, have been down. Shares of Barclays gave back 6% on the numbers that showed a beat to analysts' estimates—but apparently the wrong kind. But those who were doubted and didn’t miss have been rewarded. The positive reaction for LVMH, Greggs and Page Group are perfect examples of this.

That is what dog days do: They confound you, creating a mirage behind the heat haze. Growth in the United States continues to surprise to the upside, but not elsewhere. The concerns over blowing the cashflow on artificial intelligence (AI) will likely dog the hyperscalers until sales and thus cashflow returns. The whole chain could rise and fall each month with news and sentiment.

I am indebted to my colleague Lukash Kalwak for his US midterm election cycle CBOE Volatility Index (VIX) graph, going back to 1990. This year is like all the midterm years, nothing exceptional, AI or no AI. Known as the ‘fear guage’, the VIX measures the market’s expectations of 30-day volatility and is seen as a barometer of market sentiment. (Extreme VIX readings in either direction typically signal market turning points.)

I think the market is due for a rally, then a selloff to the election date and then a rally to year-end.

 So enjoy the summer, be ready for post-holiday volatility and a decent finish to the year.