The stock market sell-off triggered by weaker US jobs data could be “overdone”, according to some fund managers.
Jim Smigiel, chief investment officer at SEI, noted US jobs report released last Friday showed the US added 114,000 new jobs in July.
As well as this, the US economy grew by 2.8% in the second quarter and inflation is running at 3% year over year.
“From our perspective, while we agree that US economy has hit a soft patch in the data, we do not see heightened risks of recession at this time. Therefore, this feels like an over-reaction to a chain of events that is being exacerbated by crowded and levered positions.”
Tom Sollis, multi-asset portfolio manager at Russell Investments, said the aggressiveness of the market movement was “quite surprising”, but that it reflected a potential overreaction as well as the stretched positioning of many market participants.
Since the US jobs data release on Friday and the subsequent market reactions since then, markets now expect five interest rate cuts by the Federal Reserve for the remainder of the year.
“We think the market could be overreacting to both the data flow from the US and Japan,” said Sollis.
The Bank of Japan recently increased interest rates, which went against consensus.
Jack Janasiewicz, portfolio strategist at Natixis Investment Managers, noted that August seasonality remains a historically weak time for markets.
“And right on cue, we get a correction,” he said.
An unwinding of positions from levered investors “makes this weakness feel a lot worse than it probably is”, said Janasiewicz. “The economy is slowing. Not slow. A soft patch. Not a recession. The Fed can course correct and has plenty of fire power to do so.”
He noted that views on risk had shifted from inflation worries to labour market softness, but he also said that “sentiment may very well be overshooting once again. But this time, overshooting to being too pessimistic”.
“Evidence certainly points to a slowing economy. But slowing and slow are two very different points. Keep in mind that starting points matter. The most recent advanced GDP print for the US economy came in at +2.8% QoQ annualised, well above expectations.”
Although the AI/tech trade might have run ahead of itself, many of these names are still posting strong earnings, he said, and although earnings were falling short of expectations, those expectations had been “very lofty” in some cases.
Vontobel’s Andrew Jackson, head of fixed income: “Last week’s soft US jobs data has continued to wreak havoc across markets, with many asset classes, sectors and regions suffering major declines. The first step of this price correction was in line with our expectations based on the recent data; but we are likely now entering an overshoot territory.”
