by Liz Ann Sonders, Jeffey Kleintop, Kathy Jones, and Kevin Gordon, Charles Schwab & Company Ltd.
Take the past week. The Federal Reserve was firmly on the path to continued aggressive rate hikes thanks to strong economic data—until turbulence struck the banking sector. Meanwhile, China has been showing signs of stronger-than-expected growth, a surprise after the world's second-largest economy missed its growth targets last year.
U.S. stocks and economy: Push and pull
This push-and-pull has been an aspect of the economy and markets for months. The U.S. economy added 311,000 jobs in February, following a 504,000-job gain in January. A strong pace of hiring suggests larger and/or more rate hikes will follow this year. But on the other hand, gains in the labor force participation rate (to 62.5% from 62.4%) and the unemployment rate (to 3.6% from 3.4%) indicate that more people are coming off the sidelines, looking for work, and not finding it—factors which argue for a gentler Fed approach.
Slower average hourly earnings growth in February also indicated that the labor market is decelerating. However, as you can see in the chart below, the drop in overall wage growth is mostly due to a decline in higher-paying jobs. For nonsupervisory workers' wages (which are lower), growth has stabilized at just under 5% (at a three-month annualized rate), as hiring remains strong within that group.
Wage growth has declined unevenly
Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 2/28/2023
Quits and openings rate fall at different rates
Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 1/31/2023
JOLTS is a monthly survey of private nonfarm establishments and local government entities which provides information on total number of job openings, hires, and separations (voluntary quits and layoffs/discharges).
Investor sentiment takes a dive
Source: Charles Schwab, SentimenTrader, as of 3/10/2023
SentimenTrader's Smart Money Confidence and Dumb Money Confidence indexes are presented on a scale of 0% to 100%. When the Smart Money Confidence Index is at 100%, it means that those traders historically most correct on market direction are 100% confident of a rising market; when it is at 0%, it means those traders are zero percent confident in a rally. The Dumb Money Confidence Index works in the opposite manner. For illustrative purposes only.
Fixed income: What will the Fed do now?
Expectations for the path of the fed funds rate have shifted lower
Source: Bloomberg, as of 3/17/2023
Market estimate of the federal funds rate using Fed Funds Futures Implied Rate (FFM2 COMB Comdty). For illustrative purposes only. Futures and futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure for Futures and Options prior to trading futures products. Futures accounts are not protected by SIPC.
Global stocks and economy: China surprises
Indeed, economic data is already exceeding expectations by the widest degree in more than 15 years. The manufacturing purchasing managers index (PMI) rose into expansion territory for the first time in seven months in February, driven by a 23-month high in business confidence.
China's positive economic surprises rose to a 15 year high in February
Source: Charles Schwab, Macrobond data as of 3/10/2023
After rebounding nearly 60% from October to January, Chinese stocks (as measured by the MSCI China Index) pulled back heading into the Two Sessions meeting. April and November historically have been the best months for China's stock market, and the MSCI China Index posted the best monthly returns for the year after the Two Sessions meeting in March and plenary sessions in October. There can be no guarantees, but April tends to be the strongest and one of the most consistent months of the year for gains, as you can see in this heat map of monthly returns.
MSCI China Index typically strongest in April and November
Source: Charles Schwab, FactSet, data as of 3/6/2023
The MSCI China Index captures large and mid-cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 717 constituents, the index covers about 85% of this China equity universe. In the heatmap, green is positive and red is negative; gradations of each color represent relative intensity of positive or negative performance. Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Past performance is no guarantee of future results.
Tensions between the U.S. and China seem to be on the rise but are unlikely to impact the economic recovery. As we outlined in Investors' Guide to Geopolitical Risk, certain products and U.S. companies may face greater restrictions to being sold or investing in China, and the U.S. government may impose sanctions should it conclude that China aided Russia's war effort. However, China's recovery depends on domestic-led consumption, which is unlikely to be impacted by these tensions.
What investors can do now
It's also important to embrace the practices of diversification and periodic rebalancing. Diversification means having a portfolio that is appropriately allocated (based on your goals, investing timeline and risk tolerance) to an array of investments, including U.S. and international stocks, bonds and cash. Rebalancing means periodically selling positions that have gained in value and become overweight to the rest of your portfolio, and using the proceeds to shore up positions that have become overweight. Rebalancing at regular intervals (for instance, annually) can help keep your portfolio in line with your original targets, leaving you potentially better positioned when markets change direction.
Kevin Gordon, Senior Investment Strategist, contributed to this report.