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.
