The stock market can be like a temperamental teenager. When things are going well everything is sunny and every cloud has a silver lining. Suddenly though, everything can change. As a parent, you can only guess what has changed, often you are afraid to ask, but you know there has been a change from all the slamming doors and sulks.
The beginning of August has seen the stock market have one of its occasional temper tantrums and like any parent we think that this is best dealt with benign patience as it will blow over soon; not sure when, but soon.
Since October 2023 through to July 2024 the US stock market had one of its sunny, happyv periods. The S&P 500 gained some 30% spurred on by steady economic statistics and encouraged by the optimism surrounding AI. The stock market ignored signs of a manufacturing slowdown in the US and gently slowing job growth; even bad news was good news as a slower economy would mean lower interest rates which would be good for markets.
Things changed abruptly though. A highlight every month for financial markets is always the Non-Farm Payroll numbers, the number of jobs gained or lost in the US. They come with an estimate of the US unemployment numbers and how much overall pay increased. They usually come out on the first Friday of the month. The figures from last Friday August 2nd, showed that 114,000 jobs had been added in July, below expectations of 175,000 and showed that unemployment had picked up from 4.1% to 4.3% – up because of immigrants adding to the unemployment roll. These figures still showed job growth, but at a gently declining rate as can be seen in the chart below.
There is always some variability in the month to month in the US’s job creations, caused by economic factors, but also by seasonal factors and by weather like Hurricane Beryl hitting Florida in July. However, on this occasion the market had something of a conniption fit. Instead of seeing the potential of gently falling interest rates, the market has flipped to seeing the possibility of a recession. We therefore had a brief and abrupt sell off in the S&P 500 on Friday which was picked up by other international equity markets.
The US sell off was followed by a dramatic 12% drop in the Tokyo stock market on Monday, 5th August. The US job numbers were said to be partly to blame, along with the appreciating yen, which is bad for the large Japanese exporters like Toyota and Panasonic. Whatever the cause of the drop in the Tokyo stock market it was nearly reversed by a 10% bounce on Tuesday 6th August.
The temper tantrum in the US and Japanese equity markets have not really impacted sibling markets like the corporate bond market or the commodity markets suggesting that the market is only letting off steam after a very good first 6 months of the year.
It is not surprising that the equity markets had a headache after the sugar rush in the first 6 months of the year. We expect a period of sulky sideways markets as they sleep-off their headache and we find which way the global economy is heading.
Our view is that monetary policy is too tight in the US (and the UK and Europe too) but that doesn’t mean a US recession is likely, with the US labour market remaining strong and unemployment remaining low. US interest rates are likely to fall in September and lower rates will support the economy. We have expressed that view in portfolios through exposure to bonds and other interest rates sensitive assets such as growth equities and real assets. Like that temperamental teenager, we think markets have simply been a little bit dramatic.
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