US markets, Fed conundrum, EU optimism and Venezuelan inflation

Sahm rule triggered but S&P 500 remains resilient

What the chart shows

This chart illustrates the historical performance of the S&P 500 around the triggers of the {{nofollow}}Sahm Rule. The US recession indicator is triggered when the unemployment rate's three-month moving average rises above its low over the previous 12 months.

Behind the data

Data released last Friday showed the US unemployment rate rising to 4.3%, with nonfarm payrolls increasing by only 114,000 in July – both significantly {{nofollow}}worse than expected. This breached the Sahm Rule and amplified recessionary fears, negatively impacting risky assets like the S&P 500.

Historically, the S&P 500 on average tends to bottom after such a trigger.

The median performance indicates some downside risk over the following six months, but the interquartile and percentile ranges suggest a relatively positive performance over the subsequent year. So, while the market may face turbulence at first, recovery and growth are likely in the longer term.

Although empirical data tends to show an upward bias post-trigger, caution is advised due to less downward pre-trigger adjustment than usual.

Consumer cyclicals and technology poised to benefit from Fed rate cuts

What the chart shows

This chart shows the average performance of US sectors relative to the broad equity market over 12 months after the Federal Reserve (Fed) initiated rate cuts. The areas in red indicate sectors performing worse than the benchmark while green areas indicate sectors that are performing better.

Behind the data

Six months after the Fed initiates rate cuts, pro-cyclical sectors like consumer cyclicals and consumer services stand out. Over a 12-month horizon, consumer cyclicals, technology, consumer non-cyclicals, and healthcare sectors become prominent, driven by increased consumer spending, business investment, and attractive dividend yields due to lower interest rates.

On the contrary, utilities and finance typically underperformed the benchmark over the subsequent year.

Political policies could also significantly influence the upcoming monetary easing cycle beyond mere cyclicality.

Bitcoin and gold boost portfolio performance 

What the chart shows 

This dashboard simulates the returns of a classic US 60/40 portfolio, but with additional assets incorporated in increments of 10% or 20% -- reducing the original proportions of US stocks and bonds accordingly. For example, adding 10% gold to the portfolio changes the composition to 54% stocks, 36% bonds and 10% gold.

Behind the data

Recent recession fears have led the traditional 60/40 portfolio, composed of 60% S&P 500 stocks and 40% US 10-year government bonds, to outperform. Among the 11 additional assets we analyzed, only Bitcoin, gold and ESG-focused equities have shown potential to enhance returns. Conversely, incorporating other assets such as European or emerging market equities, US cash or high-yield bonds may dilute the portfolio’s overall returns.  

Improved manufacturing employment and rising prices complicate Fed decision-making

What the chart shows

This chart compares the Federal Reserve Bank of Philadelphia’s regional manufacturing survey results for employment with prices received over the past 20 years. It uses scatter plots and regression analysis to illustrate the relationships between current and future outlooks.

Behind the data 

Manufacturing hires improved over the past six months, shifting from a period of recovery to optimism for both current and future outlooks in July. 

Meanwhile, prices received for manufacturing goods – indicative of goods inflation – have shown growth in both current and future indices. These improvements in employment and prices complicate the Fed’s decision-making process, as they must balance economic growth with inflationary pressures. Consistency with long-term trends further underscores the complexities the Fed faces in formulating monetary policy.

European optimism poll reveals stark divide

What the chart shows 

This chart visualizes the results of the European Commission’s semi-annual poll, which surveys EU citizens on whether they feel optimistic or pessimistic about the future of the European Union (EU). The data is sorted by the combined shares of respondents who feel either very optimistic or fairly optimistic, ranking the most EU-optimistic countries at the top and the most EU-pessimistic ones at the bottom.

Behind the data

Only 65% of EU citizens feel optimistic about the Union's future, with the highest optimism – 80% – in Denmark and Ireland. Nordic and Eastern European countries such as Lithuania, Poland and Romania also show higher optimism. In contrast, "old Europe," particularly France and Germany, display significant skepticism. Greece's low optimism is not surprising due to its history with the EU, marked by high inflation, economic hardships and significant public debt. But the concerns in France and Germany are more troubling, indicating deeper issues within these major economies.

Weak retail sales highlight China’s tough economic recovery

What the chart shows

This heatmap shows year-over-year growth in China’s retail sales across various categories, as indicated by the figures in each row. The blue-shaded tiles indicate high retail sales growth as compared to previous observations over the last three years for that category, and vice versa for the red-shaded tiles. 

Behind the data 

The data highlights the volatility in consumer behavior and its impact on China’s economic recovery, which faces significant hurdles amid the government’s 5% GDP growth target. Despite good progress in late 2023, Chinese consumers seem to have spent less in the first half of 2024. Recent retail sales reports were {{nofollow}}weaker than expected, resulting in a more pessimistic outlook in the heatmap and an overall growth of only 2% in June. 

Inflation eases in Venezuela but economic challenges persist

What the chart shows 

This chart tracks Venezuela’s inflation rate over the past 35 years, segmented by the presidential terms of Hugo Chávez and Nicolás Maduro and using a logarithmic scale for clarity. It highlights the dramatic shift in the country’s economic stability between the two presidencies. 

Behind the data 

Venezuela’s {{nofollow}}recent presidential elections have faced allegations of fraud, intensifying social unrest. Despite Maduro’s self-declared victory, international observers, including the European Commission and the US, criticized the election’s integrity. The previous 2018 election was also deemed flawed and led to significant unrest. Recent results have again triggered widespread protests, with many citizens alleging electoral fraud.

The economic instability under the current regime is linked to severe inflation, currency devaluation and widespread poverty. Inflation, which was below 40% during Chávez’s tenure from the late 1990s to 2013, skyrocketed under Maduro, peaking at over 344,000% in early 2019. While inflation has since eased to around 50%, the ongoing economic challenges suggest a long road to recovery for Venezuela.