by Jason Bodner
August 22, 2023
August is the month when Americans get jealous of Europeans, who are notorious for their month-long vacations. Many workers take all of August off. That fact even fueled a legendary spat between hedge fund titan Dan Loeb and a prospective employee. Their leaked email conversation devolved quickly, leading to Loeb stereotyping the European as lazy and not wanting to work hard.
Interestingly, prior to 1919, European workers scarcely had any vacations. Breaks were unpaid and didn’t foster travel. But in 1919, some French bakers and printers won a week’s paid vacation. Then politicians saw an opportunity. They viewed workers’ time off as a way to mold society. They urged workers to be political and patriotic during vacations. By 1925 paid vacation was the law across Europe and by World War II, European vacation was politically secure. It kept expanding through the 1980s, when several European countries guaranteed five weeks’ paid vacation per year. And five weeks is a minimum in France. Most French get 6-10 weeks annual leave, depending on their job, on top of paid public holidays.
If Europe indeed shuts down for August, why don’t their stock markets shut down?! After all, volatility is to August as white is to rice. We’ve seen plenty of evidence of that, and this August is no different.
Global stocks have been feeling the pressure, many sinking to two-month lows. It’s partly because bond investors have been selling U.S. Treasury securities lately, pushing yields higher. The 10-year bond hit 4.328%, nearly the highest level since 2007. This is because bond investors feel interest rates will stay higher for longer, or even that rates may rise further. When current rates pay less than what investors think they will be paid in the future, they are worth less, so the bonds get sold, shoving yields higher.
This hurts stocks: The MSCI all-country index is off 5.85% thus far in August, per this ACWI ETF chart:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Talk about August volatility arriving right on schedule! As U.S. economic data continues to beat expectations, stocks pay the price for those higher bond yields. The UK 10-year bond is also at the highest levels since 2008, so bond investors are reminded of the Fed mantra, “Higher for longer.”
They did this before, throughout the year, and frankly it gives a great excuse to punish stocks, only to buy them back later, lower, should there be a reversal in trend in yields – like happened earlier this year.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Federal Reserve minutes showed that members worried about continued risks of inflation – fueling all the rate hike talk. But keep in mind: The CPI has significantly fallen from 9.2% to 3.2%, just above the Fed’s long-term goal of 2%. Also, the latest July CPI was below expectations. In my humble opinion, this provides a great narrative for August and September yuckiness, which seasonally happens according to my research since 1990. But also remember that Q4 is historically the strongest (here’s that chart again):
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Getting back to the media drivers of volatility, let’s add fear of China liquidity as more gas on the fire. Zhongzhi Enterprise Group is a major financial firm that said it needs to restructure its debt.
There’s trouble in the Chinese property market, too, with Evergrande filing for bankruptcy protection. That sent Asian shares lower, further pressuring global stocks.
The saying goes, “When the cat’s away, the mice will play.” Most of Wall Street is away on vacation in the dog days of summer. Many are doing their best to emulate Europe’s vacation mentality. Liquidity thins out, which is a precursor for higher volatility. All you need are some scary headlines to catalyze the assault on stocks. My bet is that we will continue in this choppiness for a while.
Nothing would make algo traders happier than to force a “capitulation day,” a shaking out of scared investors. That’s always when the trend bends and stocks rebound. Then, remarkably, the headlines get brighter. There’s evidence suggesting this might be the case, too.
As MAPSignals points out, the flow of big institutional money has a distinct cycle:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
If the type is too small, you can click it to expand, or read my paraphrase of the cycle here:
1) Big buying, little selling: a rising tide lifts all boats.
2) Buying slows down, selling starts: near the peak.
3) Buying all but stops and selling grows: the roller coaster starts the drop.
4) Buying is nowhere, selling is high: fear and loathing.
Looking at the chart of big money buying and selling of stocks, it looks like we are in #3 now.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We also see the BMI falling fast. Remember, this is a key indicator of money flows in the market:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The indicators now line up for what we expected – a summer that has most investors wondering if we should just close the stock market. August sucks for now, but there are a few things to keep in mind:
1) Volume is low, and we can see Looking at this chart of unusual trades, which just shows unusual volume transactions, we clearly see prior violent drops are accompanied with spikes in unusually large volume. It may be a precursor, but we are seeing low volume right now:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
2) Remember, stocks should start lifting beginning in October and rise through to the end of the year.
I warned you of summer volatility, and it is here big-time, but it’s important to remain focused on the data and seasonality. September usually isn’t much better than August, so hang in there. We have about six weeks to go, but the flip-side of fear is that it brings plenty of opportunity for forward thinkers.
Summer finds Europeans tuning out for the month of August – at least – so should we really be fretting over the latest headline-driven angst? I say no. We should mentally close the market. The news will have you believe there’s plenty to worry about, but in the words of Corrie ten Boom: “Worry does not empty tomorrow of its sorrow. It empties today of its strength.”
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Fed May Be “Data-Dependent,” But Some of That Data is Flawed
Income Mail by Bryan Perry
China’s Economy is at Risk of Experiencing a Japan-Like Lost Decade
Growth Mail by Gary Alexander
Decision Time: Will the 2020s Be Another Roaring ‘20s or Stagnant 70s?
Global Mail by Ivan Martchev
Questions About China Intensify
Sector Spotlight by Jason Bodner
With Europe Taking All of August Off, Why Not Close August Markets?
View Full Archive
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Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT
Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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