Watch Out for the Market’s Summer Surprises

Jun 5, 2024

Three sources of market stress—a cloudy economic outlook, shifting financial conditions and a high-stakes U.S. presidential contest—may leave markets primed for turmoil.

Lisa Shalett

Key Takeaways

  • While complacent investors expect markets to grind higher, the summer months could instead bring a rise in uncertainty and volatility.
  • Mixed economic data introduces risks if new readings don’t align with investor expectations.
  • In addition, current loose financial conditions could reverse as bank reserves and balances in a key Fed lending facility dwindle.
  • Uncertainty surrounding the outcome of a U.S. presidential election with major economic implications may also roil markets.
  • Investors should focus on portfolio diversification and consider investments such as real assets and investment-grade credit.

Market momentum seems to have stalled recently, with major stock-market indices retreating from all-time highs. Still, market volatility is low, asset valuations are high and investors are generally bullish. Under these circumstances, it may be easy to assume the recent pullback is just a benign reflection of the old saying, “Sell in May and go away,” which suggests a period of lower trading volumes and uneventful markets while summer vacations are in full swing.


Morgan Stanley’s Global Investment Committee is not so sure that summer 2024 will follow this pattern, however. While complacent investors may expect markets to continue grinding higher in the months ahead, we believe investor uncertainty—and volatility—are apt to rise.


Where could summer surprises come from? We recommend keeping an eye on three potential sources of market stress:

  1. 1
    Murky economic data

    The U.S. Federal Reserve has said it will look to incoming data as it weighs whether to cut interest rates or keep them elevated. The problem is the latest data haven’t revealed a clear picture of where the economy and inflation may be headed. Growth in U.S. gross domestic product (GDP), for example, was a lower-than-expected 1.3% in the first quarter, but second-quarter estimates recently suggested the economy could still be growing at an inflation-adjusted 2.7% annual pace. Meanwhile, inflation may no longer be going up, but it’s not really improving either, with the “core” personal consumption expenditures (PCE) price index, which excludes volatile food and energy items, up 2.8% year-over-year in April. With the outlook so murky, each new data point takes on added significance for markets. This introduces the risk of volatility if a reading doesn’t align with investor expectations. 

  2. 2
    Potentially tighter financial conditions

    Money remains ample in the financial system, despite the Fed’s aggressive monetary tightening efforts since March 2022. In fact, the persistence of such easy financial conditions in the face of these efforts has raised broader questions about how effective the Fed’s policy framework has been at controlling inflation. Excess reserves in the banking system, as well as an expansion of the Fed’s overnight “reverse repo” lending facility, have helped keep the cash flowing. However, as balances there decline to their lowest levels in years, financial conditions may finally be poised to tighten this summer, likely spurring market volatility. 

  3. 3
    Election uncertainty

    The U.S. presidential election may begin to loom large for markets over the summer. Not only are the polls razor thin, but both candidates are contemplating policies that have significant—and, in some cases, opposing—implications for fiscal spending, economic growth and immigration. Those factors, in turn, could affect wage disinflation, tariffs, decarbonization efforts and energy needs—and importantly, U.S. debts and deficits. Are investors getting worried? While current readings of the CBOE Volatility Index (VIX), the stock market’s “fear gauge,” imply low anxiety, the VIX futures market is pricing higher volatility from August through next February.

Portfolio Moves to Consider

These dynamics suggest investors should anticipate bumps ahead and prepare with portfolio diversification. Investors may want to balance portfolio skews with active stock-picking, focusing on quality cash flows and earnings achievability.


Consider adding cheap “insurance” in the form of call options on the VIX, which can benefit investors if equity volatility picks up, or put options on the S&P 500, which may help hedge a portfolio if the stock index drops sharply.


Portfolio diversifiers such as real assets and international investments may be useful. Also consider adding exposure to investment-grade credit.


This article is based on Lisa Shalett’s Global Investment Committee Weekly report from June 3, 2024, “Lazy Days of Summer?” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report.

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