September began much like August did, with global stock markets selling off on concerns about the strength of the US economy and with profit taking in the big technology stocks. We’ve gone into a bit more detail than usual on these themes this week (given the scale of the moves) and would expect them to remain front of mind for investment markets as we head towards the Federal Reserve’s meeting which concludes next Wednesday night.
Last week
- Global stock markets had a poor week, with the US market weighing most heavy
- US shares were dragged lower by concerns around the health of the economy and profit taking in the technology sector
- UK economic data continued its positive trend
- Bond markets held up well, with shorter-dated yields falling as US interest rate cuts got priced into markets.
This week
- The focus for markets is very much on the anticipated interest rate cut coming from the US Federal Reserve on 18th This week’s US inflation (CPI) reading on Wednesday will be closely watched to that end.
- In the UK, we have jobs data out on Tuesday and growth data out on Wednesday.
- The European Central Bank meets on Thursday where they are expected to cut interest rates by 0.25% (which would take them down to 3.5%).
Equity returns are in GBP, Oil is in USD. Gold is shown in GBP. Bond returns are all shown in GBP. Source Bloomberg.
More detail:
- Global stocks kicked off the seasonally volatile month of September by falling by 3.7% last week, with the US market weighing most heavily on returns. US stocks fell by 4.2% on the week, which made for their worst weekly drop in 18 months. Although the US market has given up some gains of late, it still remains up by over 11% for the year-to-date and is the best performing global region. Global stocks as a whole remain up by c9% for the year-to-date.
- The key drivers for the sell-off last week centred around concerns that the US economy is headed into recession and also a big pullback in the technology sector. In our view, the data thusfar, points to a slowing US economy; not one that is on the brink of recession.
- Much like a month ago, it was weak manufacturing data, weak jobs data and concerns about the US technology sector which whipped up concerns within the market. Given the size of the moves, we’ve gone into a little more detail than usual on these. Please see below:
- The US ISM manufacturing print came in at 47.2 (any reading below “50” is viewed as “contractionary”), which was a touch lower than expected. Clearly this is not a great reading, but it is worth noting that the reading was better than the number that we had in August (46.8) and also worth noting that manufacturing constitutes a fairly small part of the US economy (c10%) and has been suffering for some time. In fact, 21 out of the last 22 readings for this data point have been in contraction and the US stock market is up by over 25% in GBP terms over this period! We’d also highlight that, according to the ISM themselves, a reading above 42.5 generally indicates an expansion of the overall economy. Hence, the point that last week’s number, whilst not good, was not unexpected, not out of kilter and doesn’t (in and of itself) give a negative signal for stock markets.
- US jobs data last week was weaker than expected and we had a few data points around this. The number of job openings fell to around 7.7 million (the lowest number in 3.5 years). There are roughly 7.1 million unemployed in the US labour force, so there is now just over 1 job going for every 1 person looking; 2 years ago, the number was more like 2-for-1. We then had the much watched monthly payrolls print on Friday which showed 142,000 new jobs had been created in August. This was below the expected number of 165k, and the past 2 month’s figures were revised downwards which brought the 3-month average job gains to 116k, which is well below the average of c325k that we’ve seen over the last 3 years. Clearly, this shows some signs of slowing, but we’d highlight that the jobs report also showed that wages were ticking up (average hourly earnings nudged up to 3.8%) and that the unemployment rate actually ticked down to 4.2% from 4.3%. We’d make the point that this rate is a long way below the long-term average for the US (of 5.7%) and also, that whilst growth in the US jobs market is slowing, this month’s figure of 142k new jobs is broadly in line with the 10-year pre-pandemic average of c180k. Furthermore, we are not seeing a pick-up in “layoffs”, as the chart below shows.
Data last week showed increased tightness in the US jobs market: this suggests that the labour market is softening and it is now harder for unemployed workers to find a job.
But we are not seeing a pick-up in “layoffs”, which suggests employment remains steady (backed up by an unemployment rate at 4.2%) and workers remain confident in their job security (and can keep spending):
Source of data for both charts is Bloomberg.
- Last week saw more pressure in the technology sector, which weighed heavily on global stock returns given the high weight (c25%) that IT carries within the global share index. The $279 billion one day fall (a 9.4% drop) in Nvidia on Tuesday grabbed headlines. This is clearly a big move, but our view is that it is profit taking after a very strong run: the stock remains up over 100% for the year-to-date. Although there was news of the company receiving a subpoena from the US Department of Justice (as part of an antitrust investigation), this came out after the stock dropped and also – didn’t benefit Nvidia’s competitors – suggesting to us, that the drop was more one of general profit taking. This view was confirmed later in the week, when Broadcom (one of Nvidia’s competitors) reported their results and showed a beat on both earnings and revenue, only for the stock to drop 10% on the day! This is consistent with the pattern of rotation that we’re currently seeing in the US market, whereby those companies which have led gains (namely technology ones) have still delivered good (and better-than-expected) earnings numbers, but they have not been quite as stellar as previously, and the market has sold off on the back of them.
- US corporate earnings season is now pretty much finished (99% of companies in the index have reported) and the blended earnings growth rate is 11.3%. This is better than expected and also makes for the 4th consecutive quarter of positive earnings’ growth and the strongest quarter of growth since Q4 2021. The patterns we’ve seen have been strong growth in the tech sector (although the “beats” have been less than in previous quarters) and strong growth in sectors like utilities, health care and financials. Interestingly, those sectors which had the lowest bar of expectation have generally performed best, with the “duller” sectors such as utilities and consumer staples coming through with the best share price performance over the recent period.
- UK economic data continued its positive trend last week, with the S&P Global Composite PMI reading coming in better than expected (at 53.8 vs 53.4), better than before and firmly in expansionary territory. Another sign of growth in a resurgent UK economy, but one that got overshadowed last week by the moves in the US!
- Bonds did their job last week, with UK gilts rising by 0.9% and US treasuries rising by 1.4%. Sterling corporate bonds also did well, rising by 0.6% on the week. Encouragingly, credit spreads remained fairly stable, which suggests that corporates remain in a good position even in the face of a poor week for equity markets. Credit spreads moved a touch higher on the week, but nothing to the extent that they did in early August. Furthermore, we’d note that there was heavy issuance last week in the investment grade markets, which was oversubscribed (indicating that investors remain confident on the outlook).
- The US yield curve (measured as the difference between 10-year bond yields and 2-year bond yields) moved out of “inverted” territory last week for the first time since July 2022. This follows the same pattern as the UK yield curve, which moved into positive territory in July this year. Curves for both markets are both now fairly flat, but a move towards steepness tends to be viewed positively as investors get more reward for investing in longer-term projects.
The value of investments and the income from them can go down as well as up and you could get back less than you invested. Past performance is not a reliable indicator of future performance.
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