Equity markets rebounded last week, to end a negative month on a more positive note. Fresh stimulus in China helped investor sentiment as hopes rose of a soft landing in the US.
We have held a positive view of equities over this year, largely due to the supportive macro environment. Whilst US labour markets have been softening over recent weeks, this rise in the unemployment rate has surprisingly come despite any significant job losses. Instead, the higher unemployment rate has come as more workers have entered the work force, seeking a job, hence leading to a rise in participation rate (Chart 1). This combination of softer but resilient US labour markets supports the soft-landing narrative that inflation could cool without deep global recessions.
However, if this rise in unemployment is a sign of something more sinister, it could spell trouble for equity markets. Equities tend to underperform bonds as unemployment rises meaningfully into a recession (Chart 2). We still maintain a positive view on stocks at this point but are watching data closely as the business cycle continues from here.
Chart 1: US labour market data
Source: LSEG Datastream as at 15/08/2023
Chart 2: Stock vs bonds & unemployment (inverted)
Source: LSEG Datastream as at 01/09/2023
Equities were the top performing asset class in another week where all asset classes posted positive returns. Investor sentiment was boosted over the week as the latest labour numbers in the US were seen as more supportive of a soft landing, with fresh property stimulus in China also helping. At the sector level, the tech sector continued to outperform while energy stocks also rallied as commodities rebounded further. Hopes of a soft landing also saw yields move lower over the week. In commodities, oil rallied as brent moved close to $90 a barrel as markets moved to expect more cuts from OPEC+ (an extension of The Organization of the Petroleum Exporting Countries).
More evidence of a less tight US labour market with a rise in the unemployment rate and fall in job openings (consistent with a Federal Reserve pause). China’s drip feed of policy stimulus measures, meanwhile, seemed to step up (against a lacklustre economic backdrop).
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.