Investment Clock update: still in Recovery but the best may be behind us

Equity markets slightly pulled back from recent highs last week, as stronger than expected US wages data and the minutes of the Federal Open Market Committee pushed prospects for rate cuts further out.

We continue to hold a positive view on equities, discretionary stocks and a negative view on bonds and utilities stocks. This view is partly due to our Investment Clock which we use to guide our asset and sector allocation reviews. The recent update shows the Investment Clock remains in equity-friendly Recovery phase (chart 1), characterised by improving economic growth momentum and easing inflationary pressure.

However, recent sets of economic activity data have started to become more mixed and our Investment Clock is moving southwards towards Reflation phase where government bonds tend to outperform equity markets. We have slightly scaled back our positive views on equities and moved our views on technology stocks from positive to a small negative following strong performance ahead of the earnings seasons.

While wages remain elevated, there are tentative signs of the labour market data becoming less tight. If the labour market continues to soften, this could support slower wage growth and reduces the need for further monetary policy tightening. This seems like good news on the surface but monetary policy tends to work with a lag and once we start to see cracks in the labour market, it may take a while to reverse, leading to job losses and recessions. Stocks typically underperform bonds when unemployment rises (chart 2).

Economic Update

June saw weaker than expected payrolls in the US, but stronger than expected pay growth; UK labour market figures were overall expected than expected but came with a strong set of wages data. June global Purchasing Managers' Index signalled softer private sector activity growth.

Market Update

Global equities have started off the third quarter on a weaker note, as stronger than expected US data sparked a pullback in markets. European and UK shares were most hurt, as both regions suffered their worst weekly performance since mid-March. Despite US-centric catalysts, US stocks fared better, with the S&P down -1.1%. Bond yields moved higher over the week, Federal Reserve rate cuts were priced out to 2 May and US 10-year real yields rose to post-Global Financial Crisis highs at 1.8%.

Chart 1: Royal London Asset Management Investment Clock remains in Recovery for now

Source: RLAM as at 10 July 2023. Investment Clock trail shows the last 12 monthly readings based on global growth and inflation indicators.
Yellow dot is current reading. The faint trail is a projection based on our economic forecasts.

Chart 2: US unemployment rate (inverted) and global stocks vs bonds

Past performance is not a guide to future performance. The views expressed are the author’s own and do not constitute investment advice.
Source: Refinitiv Datastream as at 10 July 2023.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.