- Equity volatility could get worse before it gets better
- Meanwhile, bond yields fall to a 15-month low
- US Fed cuts are expected to suppress bond yields and restore calm to equity markets
On Friday, a slew of bad news caused an already jittery market to correct sharply. Since the S&P500 and Nasdaq reached their highs in the second week of July, both markets have since fallen by 6 and 10 percent respectively.
The catalyst was an unexpected spike in the US unemployment rate to 4.3 percent in July from 4.1 percent in June. This level is still in line with the US’s 4.4 percent “natural” unemployment rate, that is, the level of expected in a healthy and growing economy. But July was the fourth month of employment data weakness, and the announcement came alongside an escalation of hostilities in the Middle East, plus a reassessment of AI stock valuations.
A market over-reaction?
So is the market just looking to take away some of the froth, or are there more serious causes for concern?
On the one hand, we think it is easy to get carried away. UOBAM has long rejected the idea that the US will see a recession in 2024. We continue to hold this view despite the market’s panic that the Sahm Rule has been triggered. This rule, created by economist Claudia Sahm, is based on the fact that since the 1970s, every time the unemployment rate’s three-month moving average is below the past year’s low by 0.5 percent or more, a recession has followed soon after.
However, Claudia Sahm herself has pointed out that the US economy shows no signs of an imminent recession. The US government’s advance estimate report puts GDP growth in 2Q at 2.8 percent, double the rate seen in 1Q. This strong performance is attributed to increases in consumer spending, as well as inventory and business spending. Sahm notes that the post-Covid labour market has been exceptional – swinging from dire labour force shortages in 2022 and 2023, to a migration influx in 2024 – so the Sahm rule may not be directly applicable.
No room for complacency
This however does not mean that the Sahm Rule should be set aside entirely. There is no denying that despite its continued growth, the US economy is not looking as strong as it was. The US’s Purchasing Managers index (PMI), dropped again in July to 46.8 from 48.5 in June, indicating further contraction in manufacturing activity.
US and global markets have also run ahead of themselves. At its 16 July high, only halfway through the year, the MSCI AC World index was already up 15 percent, whereas expected global earnings growth for the year is only 10 percent. And it seems to us that the rotation out of megacap growth stocks into smaller cap value stocks still has some way to go. Nvidia may be down 15 percent over the past month, but it is still 136 percent up over the past year.
Another point to note is that historically, August and September are significantly weaker months for equities. What all this adds up to is that the market looks vulnerable to further profit taking and remains at risk of further consolidation over the next few weeks.
Equities should recover in the medium term, positive on bonds
That said, we see the current shift to a broader market positioning as a healthy development over the medium term. We expect a September rate cut and the increased potential for a 50 basis points easing by the end of the year to provide a floor for any further correction. We would expect the global equities market to resume its upward path thereafter.
Additionally, we see similarities between the current environment and 4Q 2018. Back then, equity markets corrected 10 to 15 percent in response to mounting weaknesses in growth data. However, the environment stabilised and markets gained over the next six to twelve months post sell-off.
Meanwhile, we expect bond yields to fall, given the gradual decline in inflation, potential rate cuts and continued economic growth. Friday saw 10-year bond yields drop steeply to 3.70 percent and 2-year yields to 3.73 percent, indicating that the yield curve has moved from inversed to flat. As a result of falling yields, global investment grade bond prices (as measured by the Bloomberg Global Aggregate Bond Index) have risen by 4.0 percent over the past one year.
Market risks remain from geopolitics, economic uncertainties and tax cuts should Trump win in the upcoming US elections. That said, looking ahead, the global macro environment is the most normal and balanced we have seen since the Global Financial Crisis in 2008.
| If you are interested in investment opportunities related to the theme covered in this article, here are some UOB Asset Management Funds to consider: United SGD Fund
United Asian High Yield Bond Fund
You may wish to seek advice from a financial adviser before making a commitment to invest in the above fund, and in the event that you choose not to do so, you should consider carefully whether the fund is suitable for you. |
All information in this publication is based upon certain assumptions and analysis of information available as at the date of the publication and reflects prevailing conditions and UOB Asset Management Ltd (“UOBAM”)'s views as of such date, all of which are subject to change at any time without notice. Although care has been taken to ensure the accuracy of information contained in this publication, UOBAM makes no representation or warranty of any kind, express, implied or statutory, and shall not be responsible or liable for the accuracy or completeness of the information.
Potential investors should read the prospectus of the fund(s) (the “Fund(s)”) which is available and may be obtained from UOBAM or any of its appointed distributors, before deciding whether to subscribe for or purchase units in the Fund(s). Returns on the units are not guaranteed. The value of the units and the income from them, if any, may fall as well as rise. Please note that the graphs, charts, formulae or other devices set out or referred to in this document cannot, in and of itself, be used to determine and will not assist any person in deciding which investment product to buy or sell, or when to buy or sell an investment product. An investment in the Fund(s) is subject to investment risks and foreign exchange risks, including the possible loss of the principal amount invested. Investors should consider carefully the risks of investing in the Fund(s) and may wish to seek advice from a financial adviser before making a commitment to invest in the Fund(s). Should you choose not to seek advice from a financial adviser, you should consider carefully whether the Fund(s) is suitable for you. Investors should note that the past performance of any investment product, manager, company, entity or UOBAM mentioned in this publication, and any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance of any investment product, manager, company, entity or UOBAM or the economy, stock market, bond market or economic trends of the markets. Nothing in this publication shall constitute a continuing representation or give rise to any implication that there has not been or that there will not be any change affecting the Funds. All subscription for the units in the Fund(s) must be made on the application forms accompanying the prospectus of that fund.
The above information is strictly for general information only and is not an offer, solicitation advice or recommendation to buy or sell any investment product or invest in any company. This publication should not be construed as accounting, legal, regulatory, tax, financial or other advice. Investments in unit trusts are not obligations of, deposits in, or guaranteed or insured by United Overseas Bank Limited, UOBAM, or any of their subsidiary, associate or affiliate or their distributors. The Fund(s) may use or invest in financial derivative instruments, and you should be aware of the risks associated with investments in financial derivative instruments which are described in the Fund(s)’ prospectus.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
UOB Asset Management Ltd Co. Reg. No. 198600120Z
