Equities fall on mixed US jobs data

Podcast: Jump Start: The trading week ahead with Chris Swann (3:40)
Podcast: CIO's Brian Rose on the August jobs data and its implications (11:10)
Video:CIO's Kelvin Tay on equities in a rate-cut environment (7:27)

What happened?
The S&P 500 fell 1.7% on Friday after the US August employment report failed to dispel fears that the US economy could be headed for recession.

These concerns contributed to a 4.2% decline in the S&P 500 for the week, the largest fall since March 2023. The tech sector led the selloff, with the FANG+ index—which tracks the top 10 most traded tech stocks—falling 4.2%. The risk-off mood caused US Treasuries to rally. The yield on the 10-year US Treasury fell from 3.9% to around 3.7% by Friday, before edging up on Monday. Asian equities extended declines on Monday as well, with the Hang Seng and Nikkei 225 indices down 1.4% and 0.5%, respectively.

The US generated a net 142,000 jobs over the month, below consensus forecasts of 162,000, while downward revisions subtracted 86,000 jobs from the prior two months. This took the three-month moving average of jobs growth to 116,000, the lowest level since mid-2020.

Investors focused on this weaker pace of job creation, rather than the more encouraging aspects of the report, including a decline in unemployment and a pickup in earnings growth. Overall, the data added to market angst that the Federal Reserve may have waited too long before cutting rates, adding to risks of an abrupt US economic slowdown.

What do we expect?
The market took a pessimistic view of the US jobs report. This suggests that many investors had hoped for more convincing evidence of economic resilience.

But the release was consistent with our view that the US is headed toward a soft landing. Although jobs growth has slowed, it remains positive. The unemployment rate fell slightly, rounding down to 4.2% instead of rounding up to 4.3% as in July, and is still low by historical standards. Finally, average earnings rose by an annual 3.8%, up from 3.6% in July and faster than the consensus forecast, which will support household incomes.

With the US labor market cooling gradually, the next key focus for investors is likely to be the consumer price index (CPI) due on 13 September, and August retail sales data, released on 17 September—the first day of the Fed’s policy meeting. Consumer spending has been holding up better than expected and has been important in supporting economic growth. At present, we don’t expect the fear of unemployment to cause crucial middle-income consumers to sharply reduce their spending.

In addition, we expect the Fed to start supporting the economy with rate cuts, starting later this month and with further easing at both of its two remaining policy meetings in 2024. However, in our view, recent data have not been weak enough to cause the Fed to cut rates aggressively.

How do we invest?
Despite bouts of equity weakness over the summer, the fundamentals for stocks remain positive, in our view. We expect S&P 500 companies to grow earnings by 11% this year and 8% in 2025. And historically, in the absence of a US recession, the index has gained 17% on average in the 12 months following the first Fed rate cut of a cycle.

However, we have been advising investors to brace for volatility. With economic and political uncertainty likely to linger, we recommend focusing on quality companies, with strong competitive positions, strong earnings streams, and exposure to structural growth drivers. Such firms should be well placed, particularly if economic concerns mount.

We also continue to advise investors to position for lower rates. Whether the Fed cuts by 25 basis points or 50 basis points later this month, it should kick off an easing cycle that brings interest rates to levels much lower than today’s. With other major central banks also set to continue their easing cycles, cash yields could drop quickly from here. We think the risk-return profiles of investment grade bonds, diversified fixed income portfolios, and quality equities with high and sustainable dividends are more attractive than cash. We recently moved the US dollar to Least Preferred in our global strategy; meanwhile, we are Most Preferred on the euro, the British pound, the Australian dollar, and the Swiss franc. We expect these currencies to gain against the USD through June 2025.

Finally, we see value in allocations to alternatives for those willing and able to manage inherent risks like illiquidity and a lower level of transparency. Certain hedge fund strategies, for example, have historically demonstrated their ability to stabilize portfolios and generate returns during periods of elevated volatility. Meanwhile, private equity offers investors the opportunity to invest in growing companies that are not listed on public markets, including some exposed to AI.