As unemployment ticks up in the US and Canada, markets moved up, portfolio managers explain why
US and Canadian jobs numbers released last week, with signs of unemployment rising in both countries. In the wake of what should be somewhat negative economic news, both equity and fixed income markets breathed what could be seen as a sigh of relief. It’s reflective of a market paradigm since the onset of interest rate hikes in 2022 that signs of an economic slowdown are greeted as positive news for investors, because that slowdown will gradually justify interest rate cuts. Put simply, bad news is good news.
James Learmonth and Paul MacDonald weighed in on why that is, what could prompt a change, and how advisors should manage economic news and macro headlines in the meantime. MacDonald is the Chief Investment Officer and Portfolio Manager at Harvest ETFs. Learmonth is the Senior Portfolio Manager at Harvest ETFs. Their consensus was that markets remain highly sensitive to datapoints as we sit waiting for rate cuts to begin in the US and continue in Canada.
“Big picture is that we’re in a transition from hiking to easing and in that period we’re going to continue to be very sensitive to headline data sets,” MacDonald says. “We’ve seen that across fixed income markets and equity markets, and I don’t think that changes on the next CPI print.”
Learmonth echoed that big picture view and offered some additional insight into how labour markets have played into central bank positions. Despite headlines of unemployment ticking up in the US and Canada, he notes, unemployment levels in both countries remain quite healthy by historical standards. We’re roughly in a range similar to late 2019 and early 2020, before the onset of the pandemic. Topline economic data neither shows massive deterioration nor does it show rapid acceleration, putting both the US and Canada in a bit of a goldilocks scenario. Though the US economy and US consumer both remain better positioned than their Canadian counterparts.
In this environment any datapoints that support interest rate cuts are greeted warmly by investors. Upticks in unemployment, declines in the CPI, or shifts in other underlying factors like wage growth and consumer confidence can be constructive for investors. While markets are data sensitive, Learmonth cautions against letting single points dictate a narrative.
It is unlikely, he says, that either country embarks on a dramatic rate cutting cycle because of single employment or CPI prints. As of now, he notes that futures markets have priced in a 50/50 likelihood that the US Fed cuts in September and a certainty that one cut comes by December. The odds in Canada are somewhat better, with 50/50 odds that a cut comes at each of the next few meetings.
While labour markets are key factors in central bank decisions going forward, Learmonth adds that there has been a gradual decline in the overall labour market participation rate since the early 2000s. Largely citing US stats, because that is where more granular data is available, he highlights that there has been a broad shift in the overall labour market. Fewer participants overall support somewhat tighter labour markets, which could explain some of the wage growth and relatively low unemployment we continue to see in the US and Canada.
While the labour market picture is nuanced, Learmonth says that it remains the key economic area to watch as we look for when bad news becomes bad news again. If we begin to see topline labour market reports show serious deterioration, that could become a trigger for the market. The same goes for corporate earnings, which would indicate a broader economic shift if and when companies begin to guide revenues and earnings estimates much lower.
In this environment, Learmonth and MacDonald both advocate for diversification. It’s their view that the US can negotiate a soft landing and will begin to reaccelerate in both economic and corporate earnings growth. A diversified portfolio should be able to access that turnaround when it comes. They also advocate for cash flow in the portfolio, whether through fixed income or covered call strategies, as that income can help offset any potential losses experienced before a full-blown recovery takes hold.
As advisors manage client expectations and provide context for headlines, Learmonth says that reminders of that diversification and the overall state of the economy are helpful.
“Generally speaking, the economy’s on relatively sound footing. Things have slowed, but it’s generally healthy compared to other normal environments,” Learmonth says. “We’re in a transition period for central bank policy, so there’s a lot of noise. It’s also an election year in the United States, so be prepared for volatility. Look for opportunities to put money to work, and remain diversified.”
