The week in the markets: end of a stormy summer

It’s back to school and markets are back to where they started the summer. But that doesn’t mean there wasn’t plenty of excitement along the way. It’s been a volatile holiday season.

Did we miss anything?

If you’d taken the summer off and not looked at your portfolio, you’d be forgiven for thinking nothing had happened. The S&P 500 is within a few points of the peak level it reached in the middle of July. Over here, the FTSE 100 is close to its slightly earlier high point, hit in May.

But those who did keep half an eye on their screens in early August will know that this doesn’t tell the whole story. Markets around the world experienced a V-shaped plunge and immediate rally that rattled investors as fears of a US recession met concerns that the AI growth story had been overcooked.

The summer squall in markets was a reminder that shares have enjoyed sizeable bull markets - both short term since the beginning of 2023 and longer term since the end of the financial crisis in 2009. And that has taken valuations to vulnerable levels above 20 times expected earnings in the case of the US.

Glass half full or half empty?

With markets trading at historic highs, investors are rightly looking for what could go wrong as the evenings draw in and the traditionally volatile months of September and October arrive. In the US, the top concern is the health of the economy - and this week’s focus on that front will be Friday’s non-farm payroll report.

With Federal Reserve chairman Jerome Powell making it clear at the recent Jackson Hole economic summit that he is focused on the risks of a weaker labour market, jobs data have assumed more importance than usual. A month ago, weaker than forecast labour market numbers were one of the triggers for the early August market turbulence. Another weak number this week could trigger concerns about recession and raise speculation that the Fed will cut interest rates by more than the expected quarter point at its mid-September rate-setting meeting.

Here in the UK, there are different concerns about interest rates. With service sector inflation proving stickier than the headline rate - now back at the 2% target - there are concerns that the Bank of England may struggle to cut interest rates as fast as the Fed probably will. That’s showing up in a strong pound - above $1.30 - and higher government bond yields here than in the US.

Where next for Nvidia?

Last week’s big story was the latest quarterly results announcement from what has become the world’s most influential listed company. Nvidia delivered another blockbuster set of quarterly results, but it was not enough to prevent its shares falling by 6% on the day of the announcement. As Nvidia represents 6% of the value of the entire S&P 500 index, that matters to all investors, not just those invested in the AI chip manufacturer. 

Nvidia’s revenues hit $30bn in the three months to July. That was more than double the sales from a year ago and higher than expectations. But the rate of outperformance was the smallest in a year and a half and that was enough to trigger profit taking. Nvidia’s shares are still 140% up year to date.

No Indian summer

Profit taking is the story in another investment success story of recent years. The Indian stock market has risen by more than 50% in the past five years as investors - both overseas and domestic - have seen India as a useful counterpoint to the troubled Chinese stock market for emerging market funds.

But valued as highly as the US market, India has started to experience withdrawals from nervous foreign institutional investors. Outflows of $1bn in August have capped year to date inflows at $2.6bn, a fraction of the $22bn that flowed into Indian shares last year.

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