05 September 2022
In July, the US economy created 528 thousand new jobs, bringing the total to 152.5 million. This is the same number as in February 2020, just before the COVID-19 pandemic hit (see chart). In other words, it took just 28 months for the US labour market to recover from its most dramatic recession in the last 50 years. For reference, it took more than six years to do the same after the Great Financial Crisis of 2008. This shows how unique the impact of COVID-19 was.
It also means that the American employment market is incredibly hot. While the same number of jobs are available the workforce participation rate remains 1.5 percentage below its pre-pandemic levels. Something has to give. Either more people will come back into the labour force or the job market will cool in coming months.
Back in April, we highlighted the very difficult start of the year made by a typical portfolio invested 60% in equities and 40% in bonds, and the need for investors to diversify beyond equities and bonds. After that, performance deteriorated further, troughing at -19% in June.
Since then, however, a 60/40 portfolio has strongly rebounded from the lows. While we expect a mix of the two assets to perform better in coming months, we continue to believe that such an asset allocation is far from optimal for most investors.
The surge in European gas prices was one of the first consequences of Russia’s conflict with Ukraine in February, followed by supply cuts from Moscow aimed at the EU. While pipelines remain open for now, they operate at limited capacity. This has prompted investors (and governments) to plan for possible restrictions in gas use as we enter the winter months.
The data, however, is more encouraging than most headlines would suggest. Indeed, despite limited pipeline capacity, the bloc has, overall, been able to store gas in similar proportions to those seen in the last five years. There are disparities among countries (see chart), but nothing large enough to hint at a widespread energy shortage, at least for now.
However, if Russia were to shut down gas supply completely, although it’s in line with the historical norm, the amount of the fuel currently stored in European tanks would not last through the winter, short of severe cuts in usage. This is a major risk that investors should monitor over the next six months.
There is little doubt that the Chinese economy is struggling. The government’s zero-COVID policies have led to repeated, sometimes widespread and lengthy, lockdowns this year that have taken their toll on the country’s economic momentum. In fact, in the second quarter, China’s gross domestic product (GDP) barely grew, being 0.4% year-on-year, and the central government target for 5.5% GDP growth this year looks increasingly stretched.
As such, it was not surprising to see the central bank cut the interest rate on medium-term lending facilities by 25 basis points in August. This, however, is unlikely to be enough. While Chinese authorities have been easing policy to promote growth, so far they’ve done so sparingly. There are good reasons for that (worries about inflation, excess leverage in the real estate sector, and possible capital outflows). However, we continue to expect bolder measures to be announced later this year.
November may be months away, but time flies. Soon investors and financial markets will be focused on the US midterm elections. Indeed, in less than 90 days, all 435 seats in the House of Representatives and 35 (including a special election in Oklahoma) of the 100 seats in the Senate will be contested.
Since the second world war, the incumbent party has lost an average of 26 seats following the midterms and, this time around, the outcome seems inevitable: President Biden will most likely lose his majority of 10 seats in the House. His approval rating has collapsed in the last twelve months and, according to some polls, he is now less popular than Donald Trump was at the same stage of his mandate. Back then Democrats secured 41 additional seats.
The Senate will be key in deciding what US politics will look like over the next couple of years. With a 50/50 split at the moment, the balance could tip in either direction. The good news for investors is that the most likely scenario (i.e. a gridlock) would not necessarily be a bad outcome.
Welcome to the latest edition of “Market Perspectives”, the monthly investment strategy update from Barclays Private Bank. With the Russia-Ukraine war raging on, inflation surging, and the risk of recession rearing its ugly head once again, financial markets are grappling with much uncertainty. This month’s report attempts to make sense of it all, providing insight and context behind the major trends at play.
This communication is general in nature and provided for information/educational purposes only. It does not take into account any specific investment objectives, the financial situation or particular needs of any particular person. It not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful for them to access.
This communication has been prepared by Barclays Private Bank (Barclays) and references to Barclays includes any entity within the Barclays group of companies.
This communication:
(i) is not research nor a product of the Barclays Research department. Any views expressed in these materials may differ from those of the Barclays Research department. All opinions and estimates are given as of the date of the materials and are subject to change. Barclays is not obliged to inform recipients of these materials of any change to such opinions or estimates;
(ii) is not an offer, an invitation or a recommendation to enter into any product or service and does not constitute a solicitation to buy or sell securities, investment advice or a personal recommendation;
(iii) is confidential and no part may be reproduced, distributed or transmitted without the prior written permission of Barclays; and
(iv) has not been reviewed or approved by any regulatory authority.
Any past or simulated past performance including back-testing, modelling or scenario analysis, or future projections contained in this communication is no indication as to future performance. No representation is made as to the accuracy of the assumptions made in this communication, or completeness of, any modelling, scenario analysis or back-testing. The value of any investment may also fluctuate as a result of market changes.
Where information in this communication has been obtained from third party sources, we believe those sources to be reliable but we do not guarantee the information’s accuracy and you should note that it may be incomplete or condensed.
Neither Barclays nor any of its directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this communication or its contents or reliance on the information contained herein, except to the extent this would be prohibited by law or regulation.
