Monthly Brief October 2019 – Employment Trends
Despite October’s reputation as a difficult month for equity markets, the S&P 500 Index managed to eke-out a new high. Thoughtful cases have been made by both bulls and bears for what may lie ahead as there are many conflicting factors at work. But whether it’s been improving (or less bad) expectations or crisis “fatigue”, market participants were seemingly more comfortable with the state of global affairs and pushed equity markets higher.
Different from past months was the leadership within the global equity markets. During prior months, equity gains had been led by a combination of technology and defensive parts of the market, a sign of cautionary sentiment. But recent moves have seen strong participation by parts of the market having stronger economic sensitivity, which would imply receding concerns regarding the likelihood of a recession. Also supporting this sentiment change has been both the backup in interest rates and the Federal Reserve’s comments following their October rate cut of 0.25% that they expect a “pause” before any additional easing.
October also provided another look at corporate earnings as second quarter reports were announced. While the results were generally underwhelming, many have appeared to be better than the pessimistic expectations. Could it be that the US has avoided the recession being felt across much of the globe and escaped with only an economic “soft-patch”? It may be too soon to tell but judging by the gulf between surveys suggesting a bottoming in broad employment gauges versus those of business leaders’ future expectations, the next market phase remains debatable. With the ongoing global political tensions, any signs of economic improvement will be a welcomed development against gloomy sentiment. And this may be enough to calm markets and provide new opportunities.
CHART OF INTEREST – Employment Trends
While much of the world has been in an Organisation for Economic Co-operation and Development (OECD)-defined recession, the US has managed to maintain the modestly better “economic slowdown” label. The broad manufacturing sector has struggled on the back of the US-China trade dispute, yet the service sector has fared better, offsetting manufacturing weakness and enabling the US to avoid recession to-date.
Employment trends also confirm this dichotomy. The October National Employment Report® from ADP showcases the crosscurrents that exist between the service-providing sector and the goods-producing sector. While both the total employment (+125,000) and the service-providing sector (+138,000) showed job growth, the goods-producing sector experienced a decline in jobs (-13,000).
The goods-producing sector (i.e. manufacturing) of the US economy has received much more attention as it is squarely in the crosshairs of many ongoing global disputes. Yet the strength of the service-providing sector has served to offset this and, in large-part, supported economic leadership by the consumer and modest domestic economic growth. Can it continue? If so, the US may be able to avoid the broader global recession and see the soft patch of growth begin to improve.
James Ferrin, CFA
Chief Investment Officer
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