Executive summary:
- U.S. first-time unemployment filings spiked to the highest level of the year
- Chinese equities have pulled back after an impressive late-September surge
- U.S. markets remain near record highs despite rising uncertainty
On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin assessed what the latest U.S. economic data suggests about the health of the nation’s economy. He also discussed the pullback in Chinese equities and the rise in volatility expectations for the U.S. stock market.
Is the weather to blame for the spike in U.S. unemployment claims?
Lin began with a look at U.S. weekly initial jobless claims, which rose to 258,000 in the week ending Oct. 5—the highest amount observed in over a year. However, Lin stressed that jobless claims can be volatile from one week to the next, particularly when they’re influenced by temporary business closures. “This was the case in the southeastern United States recently, with some businesses closing on a temporary basis due to impacts from Hurricane Helene,” he explained.
Lin said that if the weekly initial jobless claims number was adjusted to exclude weather-related disruptions, it would probably total closer to 230,000—an amount that wouldn’t be considered concerning. Furthermore, he said that when factoring in the exceptionally strong September jobs report, the U.S. labor market looks to be in a very healthy spot at the moment.
“At Russell Investments, the strength of the labor market, combined with some favorable consumer spending trends, has led us to lower our U.S. recession risk for the next 12 to 18 months from 35% to 30%,” he stated. In other words, the U.S. appears headed for a soft landing, Lin said, with a lesser probability that the economy could tip into a recession. However, he noted that a 30% chance of a recession is still above the average risk of a recession in any given year, which is typically around 15%-20%.
Turning to the latest U.S. inflation data, he said that the CPI (consumer price index) for September mildly surprised to the upside, with core prices rising 3.3% on an annual basis. This was a tick higher than consensus expectations for a 3.2% increase, Lin remarked, with much of the increase attributed to gains in more volatile sectors like transportation services. By contrast, price increases continued to ease in sectors that the U.S. Federal Reserve (Fed) is more focused on, including shelter inflation and core services, he noted.
All told, the latest economic data suggests that the Fed will still be in a position to lower interest rates at its Nov. 6-7 meeting, Lin said, with a 25-basis-point (bps) cut likely. However, he stressed that the central bank will continue to rely on the latest data when contemplating the magnitude of future rate cuts, potentially speeding up or slowing down the easing process depending on what the latest numbers show.
Chinese equities sell off after stimulus measures underwhelm investors
Next, Lin shifted his focus to the Chinese equity market, which saw a sharp pullback the week of Oct. 7 after surging by roughly 17% in late September.
“This looks like a classic buy-the-rumor, sell-the-news situation. Investors initially piled into Chinese stocks after the government hinted at new stimulus—only to be underwhelmed when the actual details of the policy measures were released,” he explained.
Nevertheless, Lin said he thinks the Chinese government remains committed to achieving its GDP (gross domestic product) growth target of around 5% for 2024. “I do think there’s a risk growth could come in on the lower end of this range, but I also expect China to announce additional stimulus measures in the months to come,” he remarked.
Key investor considerations amid heightened macroeconomic uncertainty
Lin wrapped up with an interesting observation: even though U.S. equity markets continue to hover near all-time highs, implied market volatility—as measured by the Chicago Board Operations Exchange’s Volatility Index (VIX)—has risen above a level of 20. VIX values greater than 20 typically suggest higher-than-normal volatility in the weeks ahead, he said.
How can the stock market be doing so well with uncertainty also on the rise? Lin said this observation underscores how hard the post-COVID cycle has been to forecast. Amid all the macroeconomic uncertainty, market discipline is crucial, he remarked.
“I believe today’s investors will benefit from staying close to their strategic asset allocations, rather than chasing into any short-term market rallies—especially with equity valuations appearing a little bit stretched,” Lin concluded.