MARKET SEASONALITY

Writing about financial services, whether it be fiscal or financial planning updates, or more far-reaching ‘macro’ analyses, has often been tied to a timetable. In the UK there is an annual budget, statements (one in spring and one in autumn), interest rate decisions and company results. In the US there are a host of other, more regular, announcements: non-farm payrolls (employment), beige book and PMIs (sentiment indicators), Fed statements, Case-Shiller announcements (residential property), as well as their versions of those UK announcements to contend with.

In addition, there are economic waves and cycles we have to be in tune with. The shortest-term of those are the seasonal deviations which, historically, have driven equity markets higher throughout autumn and winter (sometimes known as the Santa rally) which runs from October to April. Then, when markets digest (often) disappointing Q2 earnings and seemingly unsustainable short-term valuations, equities drift lower on thinner trading volume as the holiday season ensues. This pattern led to the adage, “Sell in May and go away. Come back on St. Leger’s Day.” being coined. The St. Leger is a horse racing festival at Doncaster Races which, this year, takes place in the middle weekend of September. The equity market inflection point is often within a fortnight of this date.

To deconstruct this, we are positive about equity markets in the medium and long-term but, in the short-term, valuations look stretched. Likewise, we are excited about technological advancements and AI and their implications for future economic development. However, despite the Magnificent 7’s unrelenting success and their impact on market sentiment, in the short-term, we have our concerns about equities and other risk assets.

To become pessimistic just when the seasonality suggests we should be doing the opposite is, we admit, perverse. But trends can become skewed by unusual and unforeseen events. The Trump Administration’s ‘Liberation Day’ tariff presentation, in early-April, was just that.

The fallout from Liberation Day has been well documented – by our team and the broader print media. It sent global stock markets spiralling lower by more than 10% between February and mid-April and interrupted a strong seasonal rally. As a consequence, the US S&P 500 index reached its lowest level since 2023 at a time when it would ordinarily be approaching its seasonal peak. This is when the seasonal trend became skewed (or inverted). The seasonal high was replaced by a low.

As the Trump Administration negotiation team gradually reached trade agreements with its most important trading partners, markets recovered their losses and surged higher. The UK was an early mover. Then the EU, Japan and negotiations with China have been deferred for another 90 days. All these equity indices are now at, or near all-time highs. Ordinarily this would be a bullish signal, but we are close to the seasonal inflection point (St. Leger’s festival) when markets have been going against their normal trend (higher rather than lower throughout the spring and summer) – and most recently, in the holiday season, on light volume.

Our contention is that the deterioration in economic data, in the US and worldwide, will alert traders and portfolio managers after holiday season and we will see markets retrace to more realistic valuation levels. The good news for markets – trade deals done and the likelihood of the tapering of interest rates in the US – is, we believe, ‘in the price’ (i.e. the markets have already factored these things in). Any bad news, especially unknown bad news, is likely to provoke profit-taking.

The final contributory factor to our nervousness about market levels is that on the Friday following St. Leger festival, the 19^th September, is what is called ‘Triple Witching’. That is when equity index options, stock options and equity index futures all expire on the same day. Volumes and volatility often increase markedly immediately prior to this event, and we thought it prudent to de-risk your portfolios after such an exuberant five-month rally. The markets could move decisively and brutally quickly.

MACRO OUTLOOK

Macroeconomic data looks to be starting to deteriorate. The news that the Fed will almost certainly cut rates in September with (at least) another cut expected in the fourth quarter (Q4) has buoyed markets. However, the Fed remains nervous about inflation and Andrew Bailey, the Chairman of the Bank of England, is now firmly out of step with his compatriots across the Atlantic, cutting rates while underlying inflationary pressures continue to strengthen. Should the Fed only cut once in September and then in Q4, it may well disappoint markets – it will certainly disappoint the Trump Administration who has just tried to fire a senior member of the Federal Reserve for alleged mortgage irregularities. Whether this can be done legally is yet to be determined at the time of writing.

Geopolitics continues to dominate global news flow. Trump’s meetings with Putin and Zelensky, the ongoing Middle East conflict and the wake of the US tariffs remain a destabilising force for investor confidence. The 90-day deferral of the tariffs on China looks, on the face of it, to be good news. However, again, it could unravel. The export tariff on semiconductor sales by US companies to China is unprecedented and, some argue, not legal. Given the size and scale of the companies involved, Nvidia – the first company to break through a market capitalisation of $4 trillion – is at the heart of it all and a negative shock for the company could reverberate throughout the technology sector should China refuse to concede some of its rare earth metals throughout the next three months.

One other observation which will lead us nicely into the last section of this newsletter, whereupon we will share our recent changes to your portfolios, is that company share prices are starting to be disproportionately punished if they miss their earnings expectations and only narrowly rewarded if they exceed them. Our analysis of past such instances of this phenomenon indicates that equities may well be fully valued.

TRADING

In a slight break from our usual analysis of geopolitics and what the prior month’s machinations mean for your investments, we wanted to provide an insight into the symbiosis that exists between a multiplicity of factors, which contribute to our ongoing management of your portfolios. Geopolitics is crucial (and exhausting) but only forms part of our analysis. Fundamental analysis of economies and companies is another lynchpin. However, what we have written about, we hope, illustrates that the analysis of trends, cycles and seasonal factors also play an important part in our decision making.

The combination of all these contributing factors has prompted us to reduce risk throughout your portfolios. We have taken profits from some higher risk assets, namely UK, European and large-cap US equities, and invested the proceeds into lower risk fixed income investments. This new allocation will provide significant protection from any upcoming geopolitical turbulence and market volatility, and is extremely liquid, so we can trade quickly back into equites to take advantage of any market setbacks.

We often write about our activity, conviction, and nimbleness as a boutique, and so it is always good to be able to communicate exactly what we espouse.

SUMMARY

We regularly look at how our portfolios perform against the rest of the wealth management industry; how good are our risk-adjusted returns compared to our (often much larger) competitors?

Over the last twelve months, we have consistently outperformed our peer group with a growing divergence between the performance of our industry peers and your portfolios. To elaborate, our analysis shows we at least matched the performance during the run up to the end of 2024, protected value better during the early-2025 sell-off and participated more in the recent recovery. This is active management, conviction, and nimbleness in action.

Whether we are right (or not) about the potential for markets to change direction in the upcoming weeks and months, we will be sure to have our fingers on the pulse to endeavour to continuing to produce the returns you quite rightly expect from us and we enjoy being able to deliver.