Fewer new jobs in the US, but financial markets remain calm
American employment statistics for August, which were published on September 3, showed far fewer new jobs than analysts had anticipated. “Non-farm payrolls” rose by 235,000, compared to consensus expectations of more than 700,000 jobs. The stock market interpreted this as indicating that the Delta variant of COVID-19 may have had a bigger impact on the economy than previously assumed. This, in turn, will create greater uncertainty about when the US Federal Reserve (Fed) will begin phasing out its stimulative bond purchases.
The reaction of the US fixed income market has been moderate but slightly confusing, with rising Treasury yields – a movement that looks set to continue. Ten-year Treasury yields are now at around 1.37%, or some 7 basis points higher than before last Friday’s job statistics were published.
Tomorrow the European Central Bank will announce its policy decisions
On Thursday, September 8, the ECB will hold a press conference after its monetary policy meeting. We expect the central bank to shrink its Pandemic Emergency Purchase Programme (PEPP) soon from USD 80–85 billion per month to 60–65 billion, while adjusting its economic growth and inflation forecasts somewhat higher.
Our market view
Normalisation will dampen upside potential
The world economy is in the midst of a powerful recovery. The spring and summer months of 2021 have shown the highest growth figures for a long time. This is also apparent from corporate earnings forecasts and stock market performance. The world’s stock exchanges have generally gained around 20% this year (in terms of Swedish kronor) and the Stockholm exchange even more. But earnings forecasts have also been revised upward. At present, the consensus among analysts is that global earnings will climb by more than 45% this year!
Because of sharp increases in earnings, despite share price increases, valuations have not generally risen. Our usual valuation metric – the price to earnings (P/E) ratio – has fallen slightly, making shares "cheaper". From a historical perspective, valuations are still stretched, but taking low interest rates and bond yields into account, today's stock market valuations are defensible.
The fact that valuations have also levelled out probably shows that investors now agree that the economy is moving from the rapid growth of the recovery phase towards normalisation. The world economy will continue to grow, but at a gradually slower pace. With the growth rate set to fall at the same time as major stimulus measures fade, the stock market outlook will be more uncertain. It is thus also reasonable to assume that P/E ratios will hardly climb in the future (= higher valuations). They are more likely to keep moving lower and also "normalise" as the economic growth rate diminishes.
But lower growth rates and subdued valuations do not mean that stock markets will fall. Because of continued ultra-low interest rates and bond yields, there is a lack of alternatives and an acceptance of higher valuations than historically. Combined with good (albeit lower) future earnings growth, this should be enough to justify higher share prices, though not price surges of the kind we have seen during the recovery phase this past year.
Assuming that interest rates and yields do not rise too much and too fast, this situation suggests that growth stocks with good expected profit generation may perform well. Given the attention attracted by the sustainability field and the major investments that need to be made, there will probably be a lot of winners among companies that are contributing to a more sustainable world. After sharp price increases last autumn and winter, many of these companies – especially in environmental technology – have had a tough time in terms of price performance. Given their long-term potential, this should probably be regarded as a reasonable correction that will generate buying opportunities for long-term investors.