Others may be working from home in early August — of course they are. But I have to admit it remains full-on holiday mode in my house and to be honest this week’s tumble turn in markets passed me by at first.
Not unlike the British coverage of the Olympic Games in fact, where record-breaking events occur unseen in the background while television pundits drone on about nothing — emulating my family and friends after a long summer lunch.
So I only learned that Japanese stocks had fallen the most since 1987 the following day, just as I was clueless until the morning that Armand Duplantis had jumped 6.25 metres in the pole vault, thanks to yet another TV montage of some medallist’s “amazing journey”.
Likewise, having broken my two-martini rule on Monday, I hadn’t a clue that the Vix index — a “fear gauge” which measures the implied volatility of the S&P 500 — had spiked by 42 points at one point. That’s twice the previous biggest moves seen during Covid and the financial crisis.
Nor were all UK viewers able to watch Noah Lyles in the heats of the men’s 200 metres live either. Then again, a fortnight ago my pension was worth £510,000 and when I awoke on Tuesday it was £30,000 less. Who wants to watch that in real time?
I did warn me. In my last Skin in the Game column before hitting the beach I wrote that the monthly return for global stocks over the two northern summer months is less than half the long-run average.
Worse, July is on average actually a good month for the world’s equity markets. It’s August which has struggled over the past three decades. Grown-ups are all away on vacation, I wrote, leaving junior fund managers in charge.
Is that what happened again this time? We never know who exactly is in the hot seat running our portfolios, but volatility in shares, bonds and currencies is no higher over the summer months than usual. Besides, it matters less now anyway.
That’s because of the rise of algorithmic as well as short-dated options trading. With the former, big drops automatically trigger more selling. In the 100th of a second which often separates gold and silver, billions can be lost.
By their nature, meanwhile, options prices trampoline like Bryony Page. Indeed, this is why they have become so popular with traders — especially the very short-dated options that expire within a week or even a day.
For example, retail investors’ share of the US options market has risen from roughly one-third before the pandemic to half now, according to New York Stock Exchange data. At the same time, short-dated options went from 6 per cent of the options market to a quarter today.
Add a (misleadingly) weak US employment report on Friday to technology jitters and holiday low volumes and no wonder prices gaped. It was a similar but different story in Japan. Sure foreigners fled. But Mr and Mrs Watanabe panicked too.
Come Tuesday, however, I knew there’d be no live coverage of the men’s long jump final (“We cross now to an in-depth interview with a 12-year-old skateboarder!”) so I stayed up to monitor the predictable rebound in global markets.
Now things have calmed, what is the right way to think of these latest ructions? I have seen lots and frankly this one is no different in my view. The S&P 500 down almost a tenth in two and a half weeks? It happens.
Perspective is key. All the headlines around Monday were negative. Yet the holders of many bonds (a market bigger than equities) have had a lovely time, thanks very much. My boring Treasury fund is up 3 per cent in the past month.
Likewise for each hedgie on the wrong side of the yen carry trade — where you borrow in a stable or depreciating currency at low interest rates to purchase higher-yielding assets — there are investors with big smiles.
My main rule is always to look at sell-offs (or rallies for that matter) in the context of valuation. A big fall in Nvidia’s share price since June, or the halving of Tesla’s from its high, are very different to a sudden one-fifth correction in Japanese stocks.
Overvalued securities don’t need an excuse to fall — though you will always hear one. Valuation ratios are one of the few metrics in finance that mean revert. They may take a while (longer than you can remain solvent, anyway) but normalise they do.
Undervalued or fairly valued assets also drop for no reason. But when this happens, you should quickly buy some more if you can. If you cannot, do nothing. Whatever happens, do not sell.
This is crucial. The reason is because rebound days, such as the one that happened on Tuesday, are massive drivers of performance. And they tend to follow so soon after a crash that timing them is impossible.
Take my fave Japanese equities. Over the past 15 years, they have plummeted by more than 5 per cent in a single day 10 times. Leaps of 5 per cent or more occurred eight times, and these mostly happened within a week of a sell-off on average.
Excluding two rallies out of the blue, if you missed the rebound days which closely followed the sharp declines, then your total return over the period would have been 160 per cent instead of 184 per cent. That’s a hefty sum forgone from 6 days.
So hang in there! My portfolio trailed the S&P 500 by more than 10 per cent in the year to date. That has now halved. Stay diversified. Own cheap assets. I’m now off to read with my eyes closed — as my dad used to say every afternoon on holiday.
The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__
