Over the week, markets remained volatile as investors digested a series of new economic data releases while the global economy continues its recovery from pandemic induced recession. As the data provided more clarity on the pace of recovery in key economies, markets contemplated possible fresh stimulus measures and weighed the potential for a vaccine to be available by the end of the year.
US Jobless Claims Better than Expected
Data released this week indicates that the US the labour market improved for the fourth straight month in August, as the number of Americans filing for unemployment benefits fell by more than expected to 881,000 (easing from 1 million in the previous week). Tomorrow’s job report is now expected to show the unemployment rate below 10% for the first time since March, as 1.35 million people were added to payrolls. August’s gains reflect additional rehiring from businesses that have reopened as the pandemic’s surge eased, while the expiration of supplemental unemployment benefits in July may have motivated some Americans to look for jobs.
While this is encouraging so far, chances of further significant gains moving forward are waning without the widespread stimulus payments and small-business aid that have sustained incomes and spending through the pandemic. The deadlock in further stimulus negotiations provides the biggest risk to the labour market, with payrolls at risk of shrinking as soon as September. This could make Donald Trump’s road to re-election even tougher, therefore it is our view that a deal will be reached, however the gap between the previous measures ending and new stimulus remains a key risk to the recovery.
Equity Rotation Accelerates
Following strong performance in recent months owing to strong demand for tech stocks during the pandemic, the rotation away from mega-cap tech stocks gained steam today, as the Nasdaq 100 heads for its biggest daily decline since March. Tech Giants such as Apple, NVIDIA and Zoom were among the largest declines, whereas the recently unloved financial sector saw the biggest outperformance. The rotation looks to be a result of profit taking after the 80% surge in the Nasdaq from its mid-March lows has led investors to question extremely stretched valuations.
This is in line with our outlook on the US, where we saw the potential for a rotation from megacap growth into value stocks, leading us to take profit on the US S&P 500 position earlier this week in favour of more domestically focused US exposure alongside more thematic exposure to clean energy stocks, which are well positioned to benefit from structural shifts in consumer behaviours. As such, while we remain exposed to technology as a sector, we have reduced our exposure to megacap tech on a value at risk basis.
UK Furlough Scheme Set to End
Amid speculation that the UK government would extend the furlough program enacted by Chancellor of the Exchequer, Rishi Sunak, earlier in the year, Boris Johnson has assertively confirmed that the UK’s furlough scheme will finish at the end of October. The Prime Minister said that keeping it running is not the way to bring the economy back to life. Asked repeatedly in Parliament on Wednesday about extending the program, Johnson pushed back, saying he won’t keep people in “suspended animation.”
The program has supported over 9 million jobs through the pandemic, at a cost to the taxpayer of 35 billion pounds through mid-August. But as of Tuesday, employers began paying 10% of wages for furloughed employees, a level which rises to 20% on Oct 1st. The government support is due to end on October 31st, prompting concerns from economists over a wave of unemployment as businesses remain shuttered or are forced to cut staff.
Fresh Vaccine Hopes Boost Global Investor Sentiment
The moment of truth for the front-runners of the vaccine race could come as early as this month, with the first results from third stage vaccine trials expected in the coming weeks. According to recent reports, data on AstraZeneca’s potential vaccine for the coronavirus could be available by mid-September, and they have already pledged as many as 30 million doses to the UK by the end of the month. The other major contenders, Moderna, and the US-German partnership of Pfizer and BioNTech may also have initial data on their vaccines by October 22nd when they meet before the US Food and Drug Administration. On the expectation of a vaccine, the US Federal Government has told states to prepare to distribute a vaccine by November 1st. These early trial results won’t provide the whole picture however, as they are what is known as interim readouts, that provide only a fraction of the data. The World Health Organization on Monday cautioned against approving a vaccine before its full risks and benefits are clear. But health officials in the US said the selected date is consistent with earlier preparations to ensure the infrastructure is in place to distribute any treatment when it becomes available. They also stressed that the timing has nothing to do with the presidential election taking place on November 3rd, however we remain sceptical about this.
Market Movements
Global equity markets continued their rally over the week, with the S&P reaching another all time high on vaccine hopes, while European equities gained after France introduced new stimulus measures to drive the economy and spur job creation. Meanwhile, safe havens such as gold and US treasuries slipped as global risk appetite grew.
For more information on European stimulus and economic outlook, please see the attached Market Update Document
Our Positioning
As mentioned in last week’s market commentary, over the week, we took profit on our exposure to large cap US stocks, and will be adding to areas of the US market where we see greater return opportunity moving forward, alongside a new holding in green energy which is well placed to benefit from a change in consumer trends and behaviours.
At the same time, we also took this opportunity to reduce our exposure to government bonds, as yields are at very low values compared to historic averages (prices of bonds move inversely to yields) and are likely to only increase from here as the outlook continues to brighten and risks abate. Over the coming week, we will be increasing our exposure to investment grade and high-yield corporate debt, areas which we see continuing to benefit as risks reduce. This shift will allow portfolios to benefit from improving trading conditions for corporates as lockdowns ease, and profits return.
Key Events We Are Watching This Week:
- Friday: UK and EU Construction PMI’s, US Non-Farm Payrolls jobs data
- Tuesday: EU GDP and Unemployment
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset below.
Model Portfolios & Indices
Global stock markets continued to display high levels of volatility over the week as countries across the world battle with virus challenges, mixed economic data, and stimulus expectations. Over the week, the major indices experienced mixed performance on rising virus cases and mixed economic data which varied significantly between regions. The portfolios remained relatively robust in the face of market volatility over the week, benefitting from a high level of diversification in asset classes and geographies.
Looking ahead, we are optimistic on the medium-term outlook from here, accepting further volatility in the near term, but confident in our positioning, with well diversified portfolios which have been designed to weather these market conditions. Year to date, we have now recovered from the March coronavirus decline, and we are in a strong position moving forward.
Important Information
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
This Day in History
In this day in 1939, British Prime Minister Neville Chamberlain announced that Britain and France had declared war on Germany in a radio broadcast. He formed an all-party War Cabinet with Winston Churchill as First Lord of the Admiralty.
Have a great week,
Jason & Gina
