We hope you’re all extremely well and have enjoyed, or will enjoy, a restful and reenergising break over the summer.

Turning to stocks and, unfortunately, it’s looking less likely markets will offer us a benign window in which to fully enjoy a vacation. Though stocks delivered reasonable returns across July, a vicious sting in the tail would await investors, with the sharp losses endured in the second half of the month also carrying over into the early trading days of August.

Catalysing the bearish sentiment has been growing fears of global recession lead by US weakness as ‘cracks’ in US labour market data grow wider. Though aggregate employment data remains robust, the level of hiring is decelerating, and layoffs are accelerating; a combination sending unemployment trends firmly in the wrong direction.

Though many factors will be at play, deteriorating momentum within US consumption will be elevating market nerves. Consumers can choose to spend from savings, current earnings or borrowing, with all 3 suggesting the game is almost up for this cycle’s expansion. Though very difficult to get a confident read on savings, most analysis points to the near depletion of pandemic handouts, certainly within lower to middle income groups, who have the highest propensity to spend. Wage inflation is continuing its trend lower, suggesting a diminishing tailwind from current earnings. As for borrowing, higher interest rates negate the appeal for consumers to take on more debt, whilst rising defaults in credit cards and consumer loans, discourage banks from offering more too.

This diminishing confidence in the US consumer and, therefore, the durability of a US expansion, has likely encouraged many investors to sell down their equity holdings. As is typical in an investment cycle, sellers have chosen to act where the greatest spoils have been accrued; namely US Large Cap growth or the (loosely defined) Technology sector. This perfect storm is delivering a bruising period for share prices within this realm – though year to date performance remains extremely impressive.

It is not for certain a US recession will arrive within the coming 6-12 months, however, as US consumer fire power may yet prove more resilient than many anticipate. Along with increasing levels of labour supply (in part a function of immigration) the (aforementioned) challenges of measuring US savings could result in an ‘underestimation’ of them and, therefore, may offer a further cushion to economic activity. Investors should also take comfort from the increasingly dovish tones from the US Central Bank, signalling (at this stage) that interest rate cuts will begin in September.

These easing efforts follow the lead from Canada, Switzerland, Sweden the Eurozone and (now) the UK. Such coordination may also bolster the impact of more accommodative policy, extending the ‘Goldilocks’ environment for a few quarters yet.

Reflecting upon bond markets and the continuation of disinflationary trends, catalysed by weakening (though not collapsing) labour markets, is delivering a return to form for the much-maligned asset class; reminding investors of the diversification role this asset class offers. However, as markets fret between extremes of soft-landing euphoria and recession Investors should brace themselves for a more volatile period ahead. Other than Bonds, for example, Alternative asset classes can also help diversify portfolios in a more troubling period for stock markets.

Kind regards,

iPensions Wealth Team

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