The YOLO economy is dying
The summer months typically bring calm to the markets as investors trade their desks for the beach, but not this year.
The US stock market is contracting, and investors are withdrawing their money at a near-record pace as economic storm clouds loom.
This means Wall Street titans might face turbulent conditions as they head to their Nantucket retreats.
What’s happening: "Sell in May and go away" is a common Wall Street phrase describing the trend of investors wrapping up their trading and adjusting portfolios before summer vacations. It also refers to the historical underperformance of stocks during the summer.
However, recent trading flows indicate something more significant is happening this year.
Bank of America analysts reported on Tuesday that their clients have been net sellers of US stocks for five consecutive weeks. Last week alone, they sold $5.7 billion more in stocks than they purchased, the highest outflow since last July.
Bank of America also recorded their second-largest sell-off of tech stocks ever last week. While one week doesn’t establish a trend, it contrasts sharply with the Magnificent Seven enthusiasm that recently gripped Wall Street.
Low volumes, eventful markets: The usual summer lull appears to be missing.
“Summer 2024 may prove volatile, with momentum stalling amid policy uncertainty,” wrote Morgan Stanley Wealth Management Chief Investment Officer Lisa Shalett in a note this week.
“Economic crosscurrents have left the [Federal Reserve] more tentative regarding rate cuts, amplifying the potential significance of each data point as debate continues over the degree of policy restriction,” she said.
A series of weak Treasury auctions could also disrupt markets, along with the closely contested upcoming presidential election. Market volatility in an election year typically spikes in October, but low trading volume and significant potential catalysts could cause big swings in the coming weeks.
The Dow has already seen sharp moves in the past two weeks in response to unexpected economic data.
A shrinking market: The stock market isn’t the economy (largely). Its influence over the macro environment has been diminishing for some time.
At their peak in 1996, there were 7,300 publicly traded companies in the US. Today, there are about 4,300.
Nearly 90% of all firms with revenues greater than $100 million are now private, according to Torsten Slok, chief economist at Apollo Global Management. Privately-owned firms also account for nearly 80% of all US job openings.
“Bottom line: Public markets are a small part of the overall economy,” he said.
Putting it together: A shrinking market and withdrawing investors indicate that the risk appetite in the US is rapidly diminishing.
Fear is currently driving the US market, according to CNN’s Fear and Greed Index.
Years of high interest rates, elevated inflation, a chaotic political and geopolitical landscape, and general economic uncertainty may be pushing both executives and shareholders into retreat.
What it means: This trend is concerning, according to JPMorgan CEO Jamie Dimon.
“The total [of public companies] should have grown dramatically, not shrunk,” Dimon wrote in his annual shareholder letter this spring.
The number of private companies in the US backed by private equity firms has grown from 1,900 to 11,200 over the last two decades, according to JPMorgan data.
Dimon’s company profits significantly from taking companies public, so he isn’t exactly an impartial observer. However, Dimon said his concerns extend beyond JPMorgan’s bottom line: If this trend continues, our understanding of the US economy could become murkier, he argued.
“This trend is serious,” Dimon warned on Monday. “We really need to consider: Is this the outcome we want?”