Global Financial Market Sentiment Moving Towards Caution

Peter R. Phillips, CFA^®, CAIA^®
Senior Vice President and Chief Investment Officer 
Washington Trust Wealth Management

Global market sentiment has quickly shifted to one of caution. Friday’s U.S. employment report for the month of July, which suggests a slowing but still growing labor market, has investors questioning the underlying strength of the economy and the Federal Reserve’s decision to hold the Fed funds rate steady at its July 31 meeting. 

An employment report suggesting a slowing labor market should not have been too much of a surprise to investors – or the Fed.  As we highlighted in our recently published Q3 Economic and Financial Market Outlook, the divergence between the government’s establishment and household surveys of employment over the past year suggested hiring was slowing and something worth monitoring. 

Fed Chairman Jerome Powel has acknowledged the slowing labor market in both his testimony to Congress in early July and as part of commentary related to the Fed’s FOMC meeting on July 31, just prior to the latest employment report.  Importantly, slowing doesn’t necessarily mean weak or deteriorating, but more so that “In the labor market, supply and demand conditions have come into better balance”.ⁱ  Yes, the unemployment rate ticked up to 4.3%, the highest since October 2021, but the number of employed continues to growⁱⁱ.

Nevertheless, some investors fear the Fed has kept interest rate policy too restrictive for too long which will drive the economy into recession; with the recent weaker than expected employment report providing evidence of such a policy mistake.  Such a viewpoint is likely a factor in the recent downturn in the global equity markets and sharp decline in market interest rates.

In summary, the most recent data on the economy is consistent with and really doesn’t change the general economic outlook provided in our recently published Q3 Economic and Financial Market Outlook.  That is, a slowing but still growing economy; and a near-term cautious outlook on equity prices due to valuation levels that leaved little room for disappointment.

Market volatility and lower stock prices are hard to ignore and can be stressful, but it is always important to keep focus on long-term investment objectives.  And in fact, stock market downturns can offer excellent long-term investment opportunities.  Please reach out to your wealth advisor team if you have any concerns regarding the financial markets, economy, or your portfolio. 

A note on the Japanese Nikkei Stock Index decline

The Japanese Nikkei stock index declined 12.4% on August 5, the largest one-day decline since 1987ⁱⁱⁱ.  While some of this decline is surly a reaction to U.S. economic data and financial market conditions, it should be noted the Bank of Japan (Japan’s central bank) raised its benchmark interest rate on July 31 for only the second time in 17 years^iv; and at a time when the rest of the world’s central banks are generally lowering or expected to lower rates.  This action had significant implications for the value of the Japanese Yen and ‘carry trades’^v; and in turn, likely was responsible for the extremely large decline in Japanese stock prices.