What’s driving the selloff in U.S. markets?

On a special, blog-only edition of Market Week in Review, Mark Eibel, director, client investment strategies, and Research Analyst Laura Bardewyck discussed recent economic data releases, the current market selloff and the potential influence of U.S. election season on markets.

Key takeaways from the August employment report

Two big numbers released the week of 31 August painted an improving picture for the U.S. jobs market, Eibel said: Weekly initial jobless claims and total nonfarm payroll additions. For the first time in months, the number of initial unemployment claims dropped below 900,000 - still significantly above normal, but well below the record highs seen in March and April, he said.

Meanwhile, the August employment report from the Bureau of Labour Statistics showed that the nation added approximately 1.4 million jobs last month - near to slightly above consensus expectations, Eibel noted. In addition, the unemployment rate fell to 8.4% - an improvement from July's reading of 10.2%, but still more than double its pre-pandemic level of 3.5%.

"The two figures that most people focus on in the U.S. employment report - nonfarm payrolls and the unemployment rate - actually come from two separate surveys. The unemployment rate is calculated from the household survey, and job additions (or losses) are calculated based on the payroll survey," Eibel explained. Because of this, the monthly employment report can sometimes present mixed messages, he said. "August's report is an example of this, given that it shows both strong job gains and high unemployment," Eibel remarked.

Overall, though, the jobs report does provide further evidence that the U.S. economy is moving in the right direction, he said, adding that U.S. manufacturing and housing data is also trending better. Eibel noted that in Europe, recent economic data suggests a bit of a slowdown in the region's recovery, due to a resurgence in COVID-19 cases. "Europe's current situation is a bit reversed from the U.S., where infection rates have levelled off, but I'd expect the economic data in both regions to fluctuate a bit depending on the course of the virus," he concluded.

Selloff in tech stocks drags market lower

Turning to the downturn in U.S. markets, which began 3 September with a 3.5% drop in the S&P 500® Index, Eibel noted that the selloff is being led by large technology stocks. "These tech names have more or less been going straight up for the past few months - and stocks simply can't go straight up forever. What we're seeing now is the market taking away a little bit of the valuation from large cap growth equities," he explained.

Eibel noted that beyond the U.S., the rout in markets has not been as bad, due to the fact there's less of a tech influence in non-U.S. markets. While it's too soon to know if the selloff could mark the beginning of a rotation into value stocks, he said that any positive news surrounding a COVID-19 vaccine could be good for cyclical areas of the market.

Could the looming U.S. elections spark additional market volatility?

While the current market drop isn't being driven by U.S. politics, Eibel said that the upcoming U.S. elections could wield a larger influence on markets in coming weeks, especially as summer transitions to fall. However, at the moment, investor attention is mainly focused on other issues, he noted, primarily related to COVID-19.

"In a normal year, an upcoming presidential election would probably be responsible for a little bit more volatility in the market - but right now, that volatility is being driven by other things. Simply put, there's just not much of an election effect in markets right now," Eibel stated, cautioning that this could change after the U.S. Labour Day weekend.

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

Editor's note: Market Week in Review will return next Friday in the normal video and podcast format.