Market overview
In a week marked by a flurry of quarterly earnings reports and one major rate cut, the MSCI All Country World Index (MSCI ACWI) saw a decrease of 2.0%, (9.7%YTD).
In the US, last week’s nonfarm payrolls report brought a slower-than expected growth in the labour market – with the addition of only 114,000 jobs in July – marking the lowest increase in three months. The private sector contributed 97,000 jobs, the smallest number in over a year. The unemployment rate saw a slight uptick to 4.3%.
The manufacturing sector’s activity dipped unexpectedly to 46.6, indicating contraction and marking a prolonged period of challenges for the sector. However, it’s noteworthy that manufacturing jobs remained stable in July, while the tech sector experienced a reduction in positions.
Reacting to the news alongside the busiest week of the quarterly earnings reporting season, US large caps dropped 2.0%, despite a 1.2% gain in July and a 13.0% YTD increase. Small caps experienced a sharp pullback, while both growth and value also saw declines. Tech heavy stocks were also not immune to the downturn, dropping 3.3%.
The recent market fluctuations in combination with the weaker payrolls number and the increase in US unemployment have sparked discussions about a potential US recession, yet it’s essential to approach this topic with a balanced viewpoint. The post-pandemic economy has consistently defied traditional recession indicators, and the current situation is likely no different. The slight increase in unemployment rates should be considered in the context of the changing nature of labour markets since the pandemic, as well as extraordinary events, notably Hurricane Beryl and tension in the Middle East’s influence.
Claudia Sahm – economist and creator of traditional recession indicator the Sahm Rule, which looks at short-term moving average unemployment rates– expresses scepticism regarding an impending recession: “If the Sahm Rule were to trigger (it has), it would join the ever-growing group of indicators, rules of thumb, that weren’t up to the task.”
As long as layoffs remain low, the U.S. economy is unlikely to experience a hard landing. Our view is that we’re heading for a soft landing but must wait for upcoming data points to come through to solidify the stance. Therefore, while the recent data may seem alarming, it is crucial to avoid panic and recognise the underlying strength and adaptability of the current economic landscape.
Europe’s markets echoed the cautious stance, with the MSCI Europe ex UK Index falling by 3.1%. The euro remained relatively stable against the US dollar, closing the week at USD 1.09 for EUR.
After the news that the Bank of England were cutting interest rates, UK large cap stocks (-1.3%) experienced a more modest weekly decline than peers, while mid caps saw a 2.5% decrease. The Bank of England’s rate cut contributed to the British pound’s depreciation against the US dollar, ending the week at USD 1.28.
Earning’s report from major tech leaders
Last week was pivotal for companies representing nearly 40% of US large caps market capitalisation, as they reported second-quarter earnings. Among them were tech behemoths Microsoft, Meta Platforms (Facebook), Apple, and Amazon. A recurring theme across these reports was the anticipation of substantial capital investments in artificial intelligence (AI) capabilities.
Most notably, Amazon’s shares took a major hit, dropping over 11% after revealing significant capital expenditures to bolster AI within its cloud computing division, AWS. Microsoft and Meta also disclosed hefty spending on AI, with Microsoft allocating USD 19 billion in the second quarter and Meta projecting expenditures of USD 37 billion to USD 40 billion in the latter half of the year. Alphabet’s estimated spending of USD 24 billion further underscores the tech industry’s heavy investment in AI.
Bank of England’s first cut since 2020
In a divisive move amongst its members, the Monerary Policy Committee voted five to four in favour of a quarter-percentage-point cut on interest rates, bringing the key rate down to 5%.
This rate cut follows a period where inflation consistently met the bank’s 2% target, despite persistent high inflation in the services sector. Governor Andrew Bailey – who voted for the reduction – emphasised that this decision does not signal a series of rapid subsequent cuts. He highlighted the importance of maintaining low inflation and cautioned against reducing interest rates too hastily or significantly. Investors are now anticipating one or two additional cuts in borrowing costs by the year’s end, reflecting a cautious but proactive approach to economic management.
In conclusion…
As of August 5, we note particular sell offs in markets which have performed well year to date, and which are cyclical and sensitive to economic growth, such as Japan, tech and commodities. Market corrections happen and markets move first on an initial concern and wait for data to confirm or deny. Just as the ISM non-manufacturing print came in slightly better than expected at 51.4 we believe further indicators in coming weeks will reassure markets that growth is not falling off a cliff, but slowing towards a soft landing scenario.
Overall, we are two thirds of the way through the second quarter earnings season, and we note that in general companies are beating earnings expectations in aggregate in all regions, with tech and financials holding up well. We find it re-assuring that companies continue to deliver profits ahead of expectations and that all equity regions are expected to provide year on year earnings growth in 2024 and beyond. Meanwhile, fixed income has benefited as yields decline in response to central bank rate cuts and risk off sentiment.
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