Three watchpoints for global markets as volatility resurfaces

On the latest edition of Market Week in Review, Quantitative Investment Strategist Abraham Robison and Rob Cittadini, senior director, U.S. institutional, discussed contraction in the U.S. manufacturing sector, the U.S. employment report for September and the importance of a globally diversified portfolio.

U.S. manufacturing contracts, rattling markets

The Institute for Supply Management (ISM)’s manufacturing purchasing managers’ index (PMI) slipped to a level of 47.8 in September, further extending the U.S. manufacturing sector’s slide into contraction. A reading below 50 indicates contractionary conditions, Robison noted, adding that the manufacturing sector had already dipped below 50 in August. "The September number really sent a pessimistic tone reverberating through markets, as it was both lower than the August reading and below consensus expectations," he said, noting that the S&P 500® Index dropped 1% on back-to-back days for the first time this year in the aftermath.

However, Robison cautioned against reading too much into the ISM number. Manufacturing used to comprise a much larger share of the U.S. economy than it does nowadays, he noted, explaining that in 2019, the sector is a smaller and less predictive component of the economy. "While the disappointing manufacturing number was cause for concern, it’s important to take a step back and realise its place in the U.S. today," he concluded.

Jobs report points to continued strength in U.S. economy

On 4 October, the U.S. Bureau of Labor Statistics announced that the country added 136,000 nonfarm payrolls during September - a number that Robison called moderately positive. While slightly shy of consensus expectations, the number of job additions is still above the replacement rate - the estimated number of new jobs needed each month to keep pace with population growth - of 100,000, he explained. Against a backdrop of slumping CEO confidence, an inverted U.S. Treasury yield curve and a contracting manufacturing sector, the September employment report sticks out as positive news, Robison said.

In addition, it’s important to note that the report deals with consumption, which makes up roughly two-thirds of the U.S. economy, he remarked. "This is a much larger share than the manufacturing sector," Robison said, "and the strength of the U.S. consumer, highlighted by the latest jobs report, demonstrates that a decent portion of the nation’s economy is still doing well." This gives the U.S. Federal Reserve (the Fed) more flexibility as it weighs future interest-rate cuts, he added.

The value of global diversification, plus key watchpoints

Broadening the lens to a global perspective, Robison stressed his belief in the importance of global diversification. "In times like today’s, amid high uncertainty over trade as well as mixed economic signals, I believe it’s crucial to maintain a globally diversified, dynamically managed portfolio," he stated. "Ultimately, when you’re not entirely sure where you should be, it’s prudent to be diversified and robust in your investments," Robison explained.

He concluded the segment by identifying three key watchpoints for global markets in the weeks ahead:

  1. How the September jobs report may guide Fed easing
  2. Whether China will roll out additional stimulus measures
  3. Whether Japan’s recent sales-tax increase will be offset by further rate cuts

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.