What does the latest data suggest about the strength of the U.S. economy?

Executive summary:

49ers or Chiefs? Our investment strategy analyst shares his thoughts on Super Bowl LVIII
The U.S. January employment report crushed expectations, with 353,000 new jobs
European economic indicators continue to look weak
It's important to stay disciplined in today's markets

On the latest edition of Market Week in Review, Investment Strategy Analyst BeiChen Lin and Equity Manager Research Analyst Michelle Batjargal discussed the latest economic data from the U.S. and around the world, as well as the importance of staying disciplined in today’s market environment. Lin also shared his thoughts on which team might win Super Bowl LVIII, which takes place in Las Vegas on 11 February.

The S&P 500 and the winning Super Bowl team: A tale of 49ers?

Batjargal began by asking Lin which team he thinks will win the Super Bowl: the Kansas City Chiefs or the San Francisco 49ers. "I don’t want to pick sides," said Lin, "but I will point out that on 7 February, the S&P 500® Index closed at around 4995. That’s 49…95. So, make of that what you will."

From an investment perspective, Lin said he’ll be focused on attendance at the game, as a strong showing would be yet another signal of the strength of the U.S. economy. He explained that the nation’s economy has continued to perform much stronger than anticipated, especially when looking at the mix of cyclical spending to stable spending. "The data shows that the U.S. consumer is still spending on things like travel, sports and entertainment – underscoring the resilience of the American economy," Lin remarked.

U.S. labour market remains strong

Speaking of economic resilience, Lin said that both the January jobs report and the latest PMI (purchasing managers’ index) surveys from the Institute for Supply Management (ISM) solidify the idea of a still-robust U.S. economy. January’s nonfarm payrolls report, for instance, far outpaced expectations, Lin said, with the U.S. adding 353,000 new jobs last month – significantly above consensus estimates for around 180,000 job additions. Moreover, job creation was no longer concentrated in just the leisure, hospitality, healthcare and education sectors, he said, noting that several other sectors saw jumps in hiring as well.

Turning to the PMI surveys from January, Lin said they also demonstrated signs of economic resilience. He noted that the ISM manufacturing PMI rose to a level of 49.1 last month – up from 47.4 in December. Readings above 50 indicate expansionary conditions, while readings below 50 point to contractionary conditions, he explained. "Even though the January reading suggests that the U.S. manufacturing sector is still technically in contractionary territory, a look at the subcomponents – specifically, the new orders subcomponents – shows that manufacturers received more new orders in January compared to prior months. This suggests that the contractionary conditions in the U.S. manufacturing sector may be coming to an end," Lin remarked.

He said that on the services side, the numbers were even better, with the ISM services PMI for January climbing to a level of 53. "This is further proof that the U.S. economy is fairly robust and resilient," Lin stated. The good economic news, however, does mean the U.S. Federal Reserve (Fed) might delay cutting rates, he said, noting that the Fed has already pushed back on the idea of a rate cut in March.

"If, for whatever reason, the economic data continues to remain resilient for a considerable amount of time, it’s possible the Fed may not even be able to lower rates in May," Lin remarked. He said the situation bears close watching, but that for now, his base case is that both the U.S. labour market and inflation will continue to soften in the months ahead.

U.S. vs. Europe: How do the economic backdrops differ?

Next, Batjargal asked Lin how other major economies in the world are faring as 2024 unfolds. Lin said that economic indicators in the eurozone continue to look weak, while job growth in Canada has been underwhelming in comparison to the U.S.

China’s economy, meanwhile, continues to face multiple headwinds, Lin said, including soft consumer sentiment and ongoing property-sector struggles. However, with Chinese equities priced for bad news, there may be opportunities in China for skilled active managers, he noted.

Ultimately, Lin said that the U.S. appears the most attractive for investors from a cycle perspective. However, uncertainty remains about how long this may persist, Lin said, stressing that he thinks recession risks both in the U.S. and globally remain elevated.

The importance of investor caution and discipline in today’s environment

Batjargal and Lin wrapped up with a look at U.S. equity markets, which continued to hit record highs the week of 5 February. Lin said that because markets might be underestimating recession risks, he doesn’t believe it’s appropriate to chase into the current equity-market rally.

"At Russell Investments, we think it’s prudent for investors to stick close to their strategic asset allocations," he stated. One reason for this belief is that U.S. markets appear to be somewhat overbought right now, Lin said, due to the amount of optimism among investors. Another reason is that Lin has a fairly neutral outlook on regions outside the U.S. Although equities are cheaper in places like Europe and Asia, those areas are also demonstrating less economic resilience than the U.S., he remarked.

"At the end of the day, I can’t stress enough how important it is for investors to remain cautious and stay disciplined in today’s market environment," Lin concluded.

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