Get ready for a long and messy August in the stock markets | Nils Pratley

Pick a reason for the sudden sell-off in the stock market but the common theme among all competitors is complacency.

In the first place, it is the US Federal Reserve that is accused, in the eyes of the market, of sleeping on the risk of economic collapse in the US. Friday’s weak jobs numbers added to concerns that policymakers are waiting too long to cut interest rates. Even if the recession of the US economy next year remains unbelievable in the eyes of many economists (a 25% chance, says Goldman Sachs, raising its forecast from 15%), it is a difference in expectations first market drivers. At the beginning of 2024, nobody was talking about a US recession; then it is a logical conclusion to buy examples.

A second example of indifference is the extremely high performance of the US science sector. From the beginning of 2023 until the middle of 2024, the likes of Nvidia went up in a straight line, more or less. Skeptics who said it all made sense, and pointed to similarities with the late 1990s dotcom stock bubble, were overlooked in the confusion. But now we’re at a point where nagging questions are being asked about when the big money invested in the AI ​​revolution will pay off. Given how high rates have moved (even after a small post-June correction), it’s impossible to say what the rebound might mean for short-term tech ratings. Momentum can work both ways.

Then there is a special contribution of indifference from Japan, where the Nikkei 225 index fell 12% on Monday. A modest increase in interest rates in Japan last week (from record lows) upset the market’s favorite play of borrowing in yen to buy high-yielding assets elsewhere. The yen has risen 10% against the dollar in less than a month, a huge swing. A flurry of measures related to Japan on Monday caused strong bets to burn in large numbers.

Out of that unfortunate mix of factors driving the markets, America’s outlook is the most important. The Japanese carry trade has burned scientists many times in the past without causing much damage. As for the AI ​​revolution, Nvidia investors are sitting on a 100% profit this year, so they shouldn’t overlook the risk that it could be too much, too soon. But nothing destroys stock market gains in all market sectors like a recession.

The good news, of sorts, is that the one in four chance of a US recession, if the forecast is even close to correct, still represents a good chance of a mild recession. But the less clear part – and something that will ensure a tumultuous summer as every piece of economic data is given more importance – is waiting for the US Fed to act to cut rates, as markets bond is now almost wanted.

An emergency interest rate cut sounds very difficult, as things stand. Last week’s jobs report was negative, but Monday’s report from the US service department pointed in the opposite direction by showing a boost in business activity and new orders. Therefore, plan A for the Fed would be to wait until its next scheduled meeting in mid-September. Anything else would be an admission of error.

But September suddenly feels very far away. The S&P 500 index, however, is still up 10% this year, leaving plenty of room for wild days if investors decide the Fed has made a bad mistake and a recession looms. getting worse. August can be a long month.