US, European stocks rise despite looming risks
The potential for significant deregulation and tax cuts has excited many investors, leading US stocks to “climb the wall of worry” despite immigration and tariff risks.
There is concern about US consumers, but I expect to see improved consumer sentiment thanks to lower oil prices and improving real wages.
Business owners and consumers may lament the “weakening” of their economies, but I believe it’s just normalizing as a result of central bank tightening.
Chinese policymakers announced significant monetary and fiscal stimulus that could have a substantial positive impact on the economy.
Market-watchers can often get myopic. But if we focus too closely on just one or two data points, we may not see the forest for the trees. That’s why I think it makes sense to take a step back and look at the global economy in terms of some important themes. Chief among them: the normalizing US economy, diverging consumer sentiment in Europe and the UK, easing monetary policy in major Western economies, and encouraging stimulus in China.
The US Federal Reserve (Fed) wanted to cool down a hot economy to get inflation in check. In particular, it wanted to see tight labor markets loosen. Now that is happening. However, we saw the impact of that last week when the Conference Board’s US Consumer Confidence Index fell to 98.7 in September from 105.6 in August — its largest drop since August 2021.1 This caused a negative reaction from the stock market.
The Conference Board’s chief economist explained, “Consumer confidence dropped in September to near the bottom of the narrow range that has prevailed over the past two years. Consumers’ assessments of current business conditions turned negative while views of the current labor market situation softened further. Consumers were also more pessimistic about future labor market conditions and less positive about future business conditions and future income.”1
This seemed to me to be much ado about not much, for a couple of reasons:
In fairness, there has been some weakening of the consumer — we’ve heard that articulated by companies in recent earnings calls. In particular, lower-income households are feeling the pain. But the US economy remains resilient, and I expect to see improved consumer sentiment reflected in all major surveys going forward, helped by lower oil prices and improving real wages.
Economic data in the eurozone is not as positive as in the US – for September, the flash eurozone services Purchasing Managers’ Index (PMI) is at a 7-month low, and the flash eurozone manufacturing PMI is at a 9-month low.3 But interestingly, we are seeing an improvement in consumer sentiment despite political uncertainty in a number of European economies. Flash readings of consumer confidence in the euro area and the European Union both rose 0.5 points from the previous month — almost reaching its long-term average. In the September survey, consumers were significantly more optimistic about their households’ expected financial situation.4
UK consumers don’t share the improved optimism of euro area consumers. In fact, the GfK Consumer Confidence Survey showed substantial improvement in consumer confidence until September, when it dropped materially. I suspect the new Labour government’s warnings about the fiscal situation in the UK, and ensuing trepidation over the release of the autumn Budget, has played a role in tamping down consumer sentiment. However, I think it’s important to note that flash PMIs for both manufacturing and services in the UK remained in expansion territory for September.
My takeaway is that what we are seeing is really just normalizing of Western developed economies as a result of central bank tightening. I also think this softening will be shallow and brief, and that we are likely to see an economic re-acceleration, first for the US and then followed by other developed economies, as a result of monetary easing and real wage growth
I believe the easing we’ve seen so far is just the start. As Chicago Fed President Austan Goolsbee said last week, “If we want a soft landing, we can't be behind the curve.” In the same speech, he anticipated “many more rate cuts over the next year.”5
It’s important to note that inflation concerns are largely in the rearview mirror for central banks. For example, last week’s reading of the Fed’s preferred gauge of inflation — US core Personal Consumption Expenditures (PCE) — offered no surprises; the Fed’s target appears in sight. And euro area consumer inflation expectations for the year ahead was 2.7% in September, down from 2.8% the previous month.6 Three-year ahead inflation expectations fell to 2.3%, down from 2.4% in the previous month.6 We’ve seen a similar scenario in other Western developed economies; inflation expectations are well anchored.
So now, central banks are free to react to signs of weakness with more easing. For example, last week there were calls for the Bank of Canada – which has already enacted three rate cuts in consecutive meetings – to do more because there are concerns that economic growth is falling below Bank of Canada forecasts. In other words, central banks are now free to normalize monetary policy and focus on economic growth.
Japan is also normalizing monetary policy, but in the other direction. However, it has been careful to go slow and not disrupt financial markets, which should be supportive of economic growth as well.
Chinese policymakers announced significant monetary and fiscal stimulus that could have a substantial positive impact on the economy. The People’s Bank of China’s rate cuts are significant and should have a positive impact on the Chinese economy. More importantly, the monetary stimulus will be accompanied by very substantial fiscal stimulus. While we don’t have a lot of details about the fiscal stimulus, the size alone is encouraging. Last week’s China equity rally was powerful and suggests this is what investors have been hoping for.7 What’s more, Chinese stocks are attractively valued, in my view, and I would not be surprised to see a continued positive impact as more details are released.
The key economic data releases this week are UK gross domestic product (GDP), the US Job Openings and Labor Turnover Survey (JOLTS) job openings report, various Purchasing Managers’ Index (PMI) surveys and the US employment report on Friday. And of course, US initial jobless claims have taken on far more importance now that attention has turned away from inflation and to the health of the labor market.
Date |
Report |
What it tells us |
---|---|---|
Sept. 30 |
UK Gross Domestic Product |
Measures a region’s economic activity |
|
UK Nationwide Home Price Index
|
Indicates the health of the housing market. |
|
Germany Consumer Price Index |
Tracks the path of inflation. |
|
Australia Retail Sales |
Indicates the health of the retail sector. |
Oct. 1 |
Eurozone Consumer Price Index |
Tracks the path of inflation. |
|
ISM US Manufacturing Purchasing Managers’ Index |
Indicates the economic health of the manufacturing sector. |
|
US JOLTS Job Openings Report |
Gathers data related to job openings in the US. |
|
Japan Tankan Survey
|
Tracks Japanese companies’ views of economic and business conditions. |
Oct. 2 |
US ADP Report |
Indicates the health of the US labor market. |
Oct. 3 |
Eurozone Purchasing Managers’ Index |
Indicates the economic health of the manufacturing and services sectors. |
|
US Initial Jobless Claims |
Indicates the health of the job market. |
|
European Central Bank Monetary Policy Meeting Account |
Gives further insight into the central bank’s decision-making process. |
|
US ISM Services Purchasing Managers’ Index |
Indicates the economic health of the services sector. |
Oct. 4 |
US Employment Situation Report |
Indicates the health of the job market. |
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1 Source: The Conference Board as of Sept. 24, 2024
2 Source: University of Michigan Survey of Consumers, Sept. 27, 2024
3 Source: S&P Global/HCOB, as of Sept. 25, 2024
4 Source: European Commission, Sept. 27, 2024
5 Source: Reuters, “Fed's Goolsbee sees 'many more' rate cuts ahead,” Sept. 23, 2024
6 Source: European Central Bank, as of Sept. 24, 2024
7 Source: Bloomberg, L.P. The MSCI China Index was up 17.2% for the week ending Sept. 27, 2024. The MSCI China Index captures large- and mid-cap representation across China H shares, B shares, Red chips, P chips, and foreign listings (e.g., ADRs). Past performance is no guarantee of future results. An investment cannot be made directly in an index.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
The opinions referenced above are those of the author as of 30 September 2024.
This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.
Investments in companies located or operating in Greater China are subject to the following risks: nationalization, expropriation, or confiscation of property, difficulty in obtaining and/or enforcing judgments, alteration or discontinuation of economic reforms, military conflicts, and China’s dependency on the economies of other Asian countries, many of which are developing countries.
The Conference Board’s Consumer Confidence Index® is published monthly, based on a survey of US consumers’ buying attitudes and buying intentions.
The Survey of Consumers is a monthly telephone survey conducted by the University of Michigan that provides indexes of consumer sentiment and inflation expectations.
The European Commission is the European Union’s executive arm. It takes decisions on the EU’s political and strategic direction.
Purchasing Managers’ Indexes (PMI) are based on monthly surveys of companies worldwide and gauge business conditions within the manufacturing and services sectors.
Gross domestic product (GDP) is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time.
Inflation is the rate at which the general price level for goods and services is increasing.
The Job Openings and Labor Turnover Survey (JOLTS) from the US Bureau of Labor Statistics produces data on job openings, hires, and separations.
Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.
Personal consumption expenditures (PCE), or the PCE Index, measures price changes in consumer goods and services. Expenditures included in the index are actual US household expenditures. Core PCE excludes food and energy prices.
Tightening monetary policy includes actions by a central bank to curb inflation.
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