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It’s hard to name things. My wife and I struggled for 40 weeks during each pregnancy to come up with baby names. Yet, I didn’t labor (see what I did here?) to name my monthly newsletter, which I called “Above the Noise.” I wanted the content to rise above the noise to focus on what mattered most for financial markets, and I named it accordingly.
The cacophony is almost always deafening but perhaps not as earsplitting as it is today. Wars. Elections. Hurricanes. The latest celebrity conspiracy that I can’t follow but my teenage daughter obsesses over. It’s a lot. Still, as I type this, the Dow Jones Industrial Average and the S&P 500 Index are at all-time highs.
How can that be? To stay above the noise, I focus on three main drivers for the market:
Unless the wars, the elections, or the natural disasters change my view of these three market drivers (they typically don’t), then I view them as noise as it relates to the market. Investors overly focused on politics and/or geopolitical conflict may have missed the economy’s remarkable resilience and the commencement of the much-anticipated Federal Reserve (Fed) easing cycle.
Should we name it a soft landing? A Goldilocks environment? Call it what you will. Either way, I expect the backdrop for risk assets will likely remain positive.
It may be confirmation bias, but good news is good news, and bad news is bad news again.
Let me explain. When inflation was elevated, good news for the economy was viewed as bad news for the stock market as it signaled that policy tightening would continue indefinitely. Now, with inflation contained, the markets have turned their focus away from inflation to growth and have generally rewarded good economic activity.
How do we know? Consider the rolling correlations between stocks and U.S. Treasuries, which are illustrated in the chart below. Historically, the two, on average, have been negatively correlated, meaning that when one goes up, the other goes down, and vice versa. That had not been the case between late 2023 and mid-2024. During that period, good economic news meant higher rates (lower bond prices) and poor equity performance, while bad economic news meant lower rates (higher bond prices) and strong equity performance. It appears those days are over as the correlations have once again turned negative, meaning that when stocks go up, bonds go down, and vice versa.1
Good news is good news again. It suggests that the markets believe the inflation story is over. And that’s, well, good news.
Claudia Sahm, the much-quoted labor market expert, famously said, “One month does not make a trend.” She cautions against reading too much into September’s job report. The outsized payroll report is inconsistent with other readings, suggesting that the U.S. job market is cooling. For example, job openings have fallen to a pre-pandemic level, while quit rates, which tend to decline as jobs become harder to find, are lower than they were in 2019.2 So much for the great resignation! I’d also note that payroll numbers are prone to heavy revisions.
The strong payroll report drove U.S. Treasury rates higher and reduced rate cut expectations.3 It’s likely overdone. I’m with Sahm on this one. Let’s not put too much into one number. The easing cycle will persist.
Brian Levitt is Global Market Strategist at Invesco and cohost of Invesco’s “Market Conversations” podcast.
Notes
1. Sources: Bloomberg L.P. and Invesco, 9/30/24. US Treasury (7-10-year) returns are represented by FTSE US Government Bond 7-10 Years Index. Statistics calculated using daily returns data beginning January 1993. Index returns do not represent strategy returns. An investor cannot invest directly in an index. Past performance does not guarantee future results.
2. Source: US Bureau of Labor Statistics, 9/30/24.
3. Source: Bloomberg L.P., 10/15/24. Based on the 10-year US Treasury rate and fed funds futures.
Disclaimer
© 2024 by Invesco Canada. Reprinted with permission.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions referenced above are those of the author as of Oct. 22, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from your advisor or from Invesco Canada Ltd.
Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that any fund or security will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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