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.

Glossary 

• A carry trade involves borrowing at a low interest rate and then investing in an asset with a higher interest rate. 
• The S&P 500 Index is a market-weighted index that tracks the performance of the 500 largest publicly traded U.S. companies and is considered representative of the broad U.S. stock market. 
• The option-adjusted spread (OAS) estimates the difference in yield between a security or collection of securities and a risk-free rate (typically comparable-duration Treasurys) after removing the effects of any special features, such as provisions that allow an issuer to call a security before maturity. 
• Gross domestic product (GDP) is the total monetary or market value of all the goods and services produced in a country during a certain period. 
• Price/earnings (P/E) ratio is calculated by dividing the current market price of a stock by the earnings per share. Price/earnings multiples often are used to compare companies in the same industry, or to assess the historical performance of an individual company.

Important information

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. All information as of the date indicated. There are risks involved with investing, including possible loss of principal. Diversification may not protect against market risk. This information should not be relied upon by the reader as research or investment advice, (unless you have otherwise separately entered into a written agreement with SEI for the provision of investment advice) nor should it be construed as a recommendation to purchase or sell a security. This information is for educational purposes only. The reader should consult with their financial professional for more information. 

Statements that are not factual in nature, including opinions, projections and estimates, assume certain economic conditions and industry developments and constitute only current opinions that are subject to change without notice. Nothing herein is intended to be a forecast of future events, or a guarantee of future results.