It is 53 years since Edna O’Brien published her harrowing novel ‘August is a Wicked Month’ and I have borrowed the title several times over the years. As this month claims more and more casualties it seems appropriate to do so again. This summer holiday season is certainly going to form so far with most equity markets struggling, bond yields remaining unexpectedly low, Gold drooping, crypto and many fiat currencies on the floor.

It may or may not be significant but the only major stock markets that are higher so far in August are Sydney (winter), Mumbai (monsoon season) and, of course, Wall Street. Siren voices every year tell US investors to ‘sell in May and go away’  even though the phrase is an old City of London saw.

Sometimes it works and sometimes it doesn’t. So far this summer even UK equity markets are slightly up on their April close while in the US the Dow, S & P 500, Nasdaq Composite and Russell 2000 (Small caps) have been notching up very substantial gains, some reaching record highs. The US equity bandwagon has been rolling now for (take your pick) the last 4 months, 3 years, 5 years or 9 years. Quite a few stocks have dropped off along the way and in 2018 it has often seemed that only the FAAMNGs and their US-listed Chinese cousin BATs were still left on board, all of which are genuine growth companies but their share prices have reached levels that, to varying degrees, can no longer be justified by fundamental factors. It is almost as if investors have kept betting on the bandwagon because they cannot afford it to stop. A cynical view might be that investing in the FAAMNGs has become a career insurance policy (nobody gets fired for owning them) rather than for absolute portfolio performance. Since April, far from going away, there have been even more investment flows into the dollar that has led to loop-backs in US asset prices’ pushing equity indices yet higher. However, from as recently as mid-July there have been signs that some investors believe that some US stocks are just too ‘valuable’ and at current prices do not represent ‘good value’, leading to increasing talk of rotation into ‘undervalued’ stocks.

Positive factors include the US economy and US equities’ outperforming most others by some margin in Q1 and Q2 and very strong Q2 corporate earnings but it is also the case that there is plenty to be nervous about: too much tightening by the Fed, the boost from tax cuts wearing off in 2019 while the Federal deficit surges, trade and other political tensions created by the Trump Administration. The strength of the dollar justified for positive and negative reasons can only be explained by the intervention of FX traders and hedge funds and is unsustainable for long. Perhaps the turning point will be the prospect of the US Mid-term Elections in November with the Republicans already increasingly looking like losing one or both chambers, thereby curtailing an increasingly beleaguered Mr Trump’s ability to stimulate the economy with further tax cuts or by browbeating the Fed.

The month’s biggest losers are cryptocurrencies with many down by 50% or more. I have always seen them as ‘Robin Hoods’ in reverse with naïve poorer folks being ripped off by slick promotions. The SEC has further delayd a decision on approving the creation of a Crypto ETF but the prospect of Wall St muscling in is double-edged for those already investing in cryptocurrencies. It would bring safety in the form of liquidity and regulation but also the attentions of tax authorities and, of course, small traders would be squeezed out by the professionals.

Of course, the bandwagon may well keep rolling for a while yet as the US economy drives on and US companies keep reporting strong quarterly results. Lest it be said that I am sitting on the fence, I should say that I expect stock rotation to become increasingly widespread and accompanied by quite sharp outbreaks of volatility that end in corrections rather a single major crash. I suspect this will be determined by market dynamics rather than by external macroeconomic developments, although in the age of Trump political shocks cannot be ruled out. Those who believe in monthly patterns in equity markets should note that September has on average had the worst monthly record for big caps while small caps notoriously languish between July and October.