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Investment markets:
Latest investment update
Published: August 2024
Solid economy still supports investing despite market volatility
Markets experienced some disruption this week but the US economy continues to grow at a healthy pace despite signs of a slow-down. This ongoing growth, backed by solid company performance and highly anticipated interest rate cuts, means current conditions still support investing.
The world economy remains resilient despite Monday’s market volatility.
Stock markets fell after US jobs numbers released on Friday raised concerns about an economic slow-down.
But the experts at Coutts bank behind the NatWest Invest funds say the US economy is resilient and shouldn’t slow down massively.
Lilian Chovin from Coutts’ investment team says, “There appear to be few reasons for the falls we’ve seen. The US economy is slowing but continues to grow, companies are still reporting solid profits and the chance of an imminent recession is extremely low. Overall, conditions remain positive for stocks.”
Interest rate cuts now more likely
Higher unemployment and slower economic growth in the US mean its central bank – the US Federal Reserve – is now much more likely to cut interest rates in September. They may also cut them by more than previously expected – 0.5% instead of 0.25%.
This could lower companies’ borrowing costs while encouraging people to spend rather than save, which could all be good for share prices.
The Bank of England already cut interest rates for the first time in four years last month, from 5.25% to 5%, and several other central banks around the world have done the same.
Still positioning your investments positively
The Coutts’ team had already seen that the US jobs market was starting to weaken, but they could also see that underlying economic conditions remained solid. So they still prefer investing in stocks, and recently positioned their holdings so they were more globally focused.
They also bought more US government bonds at good prices, investments which should benefit from tamer inflation and strong chances of interest rate cuts. And they moved their investments out of high yield bonds and into global credit to reflect changing market conditions.
Sahm-thing else worth knowing
US jobs numbers dropped to the point where they triggered what’s called the ‘Sahm rule’ – which measures when there might be a recession. That was one of the main things that spooked investors. But it came about for a very different, more positive reason than usual.
Lilian explains, “The Sahm rule is usually triggered by people losing their jobs and therefore spending less money, which slows economic growth. But this time around unemployment has risen because there are more people in the US looking for work, partly because of immigration, and therefore considered unemployed. So the situation is a lot less sinister than the Sahm rule would normally suggest.”
Meanwhile, in Asia, the strength of the Japanese yen over the past few weeks led to a popular currency ‘carry trade’ unravelling – a technical trade that aims to benefit from the difference in currency rates. This caused a lot of disruption in markets and contributed to recent volatility, but it’s a technical development rather than anything fundamental to the overall economy.
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