Over the years, August has gained a reputation for causing turmoil on the financial markets. A few examples: in 1998, Russia defaulted on its debt, leading to the collapse of the LTCM hedge fund. August 2007 marked the start of the financial crisis, when the US money market displayed the first signs of the problems that led to the global financial crisis over the following weeks.

In August 2011, in the middle of the European debt crisis, the downgrading of US sovereign debt by the rating agency Standard & Poor’s sparked turmoil. From a Swiss perspective, these events were memorable because they led to the Swiss franc falling almost to parity with the euro for the first time and, a little while later, to the Swiss National Bank introducing the minimum exchange rate. A surprising devaluation of the Chinese renminbi triggered a downturn on the stock exchanges in August 2015, and, last August, the trade dispute between the USA and China escalated after the Chinese authorities further devalued the renminbi.

There are no indications of history repeating itself

So will investors once again find it difficult to enjoy the fine weather and relax this summer? Let me start by allaying their fears: it is difficult to argue that the events mentioned have anything at all to do with the month of August – turmoil is not generally anticipated in August per se.

And, in any case, the situation is different in summer 2020. We have just experienced six months that – to put it mildly – have already caused quite a bit of upheaval. Any storm clouds would not be appearing out of the blue. It also seems that very little would unsettle the stock markets.

Downturns still likely

However, the situation this summer seems particularly unpredictable. The equity markets anticipate extremely optimistic scenarios for the coming quarters. As a result, price valuations are high. This means the equity markets remain at odds with the economic outlook. Many challenges are only just emerging for economies. Unemployment is set to rise, and the number of insolvent companies will increase. While recent experiences in various countries show that economic normalization is possible, coronavirus is still with us, preventing a return to normality in all sectors.

The tension between the optimism on the equity markets and the still highly uncertain economic situation poses the risk of sudden changes. This means investors must remain alert, despite the summer lull. Challenging months lie ahead. It is advisable to position portfolios to cope with any setbacks. Even if there are no turbulent conditions in August this year, we would not be surprised if they returned over the course of the year.