Written by Cormac Nevin
Last week was a challenging one for global equity markets. The MSCI All Country World Index fell -4.0% in GBP terms, and while all equity markets found themselves in negative territory for the week the worst affected was the U.S market, illustrated by the -4.5% (GBP) fall in the S&P 500 Index.
The source of the volatility we have witnessed over the last two months has been centred around economic data releases in the U.S, primarily around the health of the labour market. As we covered in prior notes, the U.S Non-Farm Payrolls employment report released on the 2nd of August undershot expectations by implying an increase in the unemployment rate and triggered a bout of market panic the following Monday. This was followed up with last week’s report whereby even though the unemployment rate fell back to 4.2% from 4.3%, the report again disappointed expectations.
Market participants are acutely focused on a concept known as the “Sahm Rule”. This metric was devised by the economist Claudia Sahm as an indicator for when the economy enters a recession. It is “triggered” once the 3-month moving average of the unemployment rate rises by half a percentage point or more relative to the minimum of the three-month averages from the previous 12 months. The dynamic which it seeks to capture is that when the labour market weakens, it does so at an accelerating rate as the growing body of jobseekers reduce demand in the economy spurring further job losses. This metric was initially triggered in the August payroll report and was further pushed into recessionary territory by last Friday’s report. Interestingly, Claudia Sahm herself has recently argued that her rule may not apply this time given large numbers of new entrants to the labour market from immigration, however markets appear to be becoming increasingly concerned about the U.S economy from a number of angles.
While the equity market’s reaction to these developments has been negative, the reaction from fixed income markets have been much more amenable, particularly in the highest-quality segments. The Bloomberg Global Aggregate Index of high-quality global bonds rallied +1.0% last week and is now up +3.9% for the quarter-to-date. The long duration U.S Treasury exposure we hold in the MAB Funds has rallied +3.4% last week and has now returned +9.5% for the quarter to date. All returns quoted were in GBP Hedged terms. Fixed income is once again playing its traditional role in providing meaningful diversification to equities, illustrating the value of a globally diverse multi-asset approach.
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All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 9th September 2024.
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