Pullback in risk assets: Sound and fury, signifying nothing?

Some observers see the recent big moves in stocks, bonds, and currencies as evidence that the Federal Reserve (Fed) has been late to act and needs to deliver large cuts to the federal-funds rate to blunt the impact of a recession that may have already begun. Others see an opportunity to “buy the dip” that slashed stock prices 10%-20%. We see little reason to panic or to change our strategy. 

The recent turbulence in the markets has little to do with any serious deterioration in the U.S. economy. To be sure, investors were shocked by the employment report issued on August 2. Not only did the unemployment rate rise, but employment growth in June and July turned out to be weaker than expected. While the headlines sound bad, our take on the labor market situation isn’t so gloomy. Consider that nonfarm payrolls still rose in July, although at a slower pace than we have seen in a while. Hurricane Beryl, which led to severe flooding in southern Texas, is partially to blame. We expect the jobs total to rebound in the next report. As Exhibit 1 shows, using a three-month moving average, nonfarm payrolls are still expanding at a decent clip, and the growth is as strong as it was in the years preceding 2020’s COVID-19 lockdowns.

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