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June 28, 2024

US unemployment trend signals potential recession; revival in ESG investing and a shift in IT

This week's charts look at the resilience of global economies amid various challenges and the pivotal role of central bank policy shifts from inflation-fighting to growth-supportive measures. We also reveal the clustering of volatile days in the S&P 500, the potential revival of ESG investing, despite recent fluctuations and finally a shift in the S&P IT sector fueled by semiconductors.
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Denys Liutyi
Hank Rainey
Siwat Nakmai
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US unemployment rate breaks historic low streak

What the chart shows

This chart shows the US unemployment rate and the number of consecutive months it has remained below 4%. In the top pane, the red line shows periods when the unemployment rate is below 4%; the blue line represents the rate at above 4%. 

The bottom pane represents the number of consecutive months the unemployment rate has remained below 4%.  We can see that the most recent streak has just ended, marking the longest such streak since 1970. The only other time the rate stayed below 4% for a longer period was in the 1950s. 

Behind the data

Throughout history, there has been a trend that once the unemployment rate breaks a long streak below 4%, a recession follows. This was true in 1949, 1953, 1957, 1970, 2001 and 2020. We have also seen that once the jobless rate rises above 4%, it often spikes much higher (see 1953 and 1970). Given that ‘maximum employment’ is one of the Fed’s two mandates, we can expect the central bank to be watching this statistic closely. 

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China may need substantial RRR cuts to stimulate financing

What the chart shows

The scatter plot illustrates the relationship between China’s reserve requirement ratio (RRR) for large banks and the growth of total social financing (TSF) since 2014. The chart includes not only actual observations but also fitted values along with their standard deviation bands derived from a simple regression of the TSF on the RRR.

Behind the data

The Chinese economy faces significant challenges. The property market’s recovery has been sluggish, as evidenced by increasing clearance times, despite authorities implementing policies {{nofollow}}to bolster the market. Meanwhile, credit activity is contracting and may require substantial support. One potential tool is reducing the RRR. Our analysis suggests that for the TSF to grow by approximately 10% compared to last year, large banks’ RRR might need to be cut by around 150bps, or over 100bps more than the current rate. Although additional RRR cuts have not yet occurred in Q2 2024, the People’s Bank of China (PBoC) has previously indicated {{nofollow}}room for further easing. There remains hope for increased credit activity in China.

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Market volatility clusters around major events 

What the chart shows

The blue line represents the price return of the S&P 500 over time on a logarithmic scale, with data starting from 2000. The green dots mark the top 40 best-performing days of the index, measured by daily percentage return. Conversely, the red dots indicate the top 40 worst-performing days.

Behind the data

Days of high volatility, both upward and downward, tend to cluster around major global events. For example, 39 of the 80 most volatile days occurred between 2008 and 2009, at the peak of the global financial crisis. Another cluster of volatility occurred around the COVID-19 pandemic shocks. This seems to confirm what we’ve always sensed: that significant market swings often continue over a period of time following major events. 

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Global real estate crisis leaves REITs struggling 

What the chart shows

This visualization shows the annual performance rankings of real estate investment trusts (REITs) in 10 selected countries over the past eight years. 

Behind the data

With the rise of the Magnificent 7 (the group of seven leading tech companies known for their strong performance), alternative investments like REITs have faded into the background. A real estate crisis is looming in many parts of the world and REITs have not provided sufficient returns since last year. 

As our ranking shows, only Australia’s real estate sector has not experienced losses in 2024 so far. The most severe situations are in Canada, China and Italy, which are all struggling with ongoing real estate crises.

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Shift in IT sector: Market capitalization of semiconductors exceeds that of software

What the chart shows:

The chart compares market capitalization of 3 subsectors of S&P 500 Index: hardware, software and semiconductors.

Behind the data:

The rapid development of AI-related technologies over the past two years has led to a sharp surge in demand for semiconductors, significantly increasing the size of the entire industry. In December 2023, the market capitalization of semiconductor manufacturing companies in the S&P 500 index exceeded that of hardware companies. By May 2024, the skyrocketing value of Nvidia allowed the semiconductor sector to surpass the entire software industry, which has traditionally been the largest subsector in the S&P 500 IT Index.

Although recent fluctuations in Nvidia's stock prices have had a significant impact on the semiconductor industry, it still remains substantially larger than the software sector.

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Pure growth stocks lead market gains amid strong US manufacturing

What the chart shows

The chart illustrates the S&P 500’s year-to-date performance by style and strategy—equal weighting, pure growth, pure value, high beta and low volatility—compared to the US S&P Global Purchasing Managers’ Indices (PMI).

Behind the data

The figure indicates that the S&P 500 index has predominantly been influenced by {{nofollow}}pure growth, driven by factors such as sales growth, the ratio of earnings change to price, and momentum. This growth trend aligns with AI narratives, exemplified by {{nofollow}}Nvidia’s recent upbeat sales growth, where Nvidia stands out as one of the S&P 500’s significant contributors. 

In contrast, other styles and strategies have performed less favorably. Interestingly, {{nofollow}}high beta performance has lagged behind pure growth. This discrepancy may be attributed to shifts in calculated beta coefficients over the past year, affecting the classification of certain equities as high beta.

Moreover, the S&P 500 index, its pure growth component, and overall stock performance this year seem relatively aligned with the US S&P Global PMI, as they rally when the PMI rises or is in expansion. Therefore, PMI anticipations might be helpful in this regard as well.

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ESG funds see renewed investor interest 

What the chart shows

The chart uses data from EPFR to compare the total number of ESG funds versus net flows, i.e., the difference between the amount of money being invested in and withdrawn from these funds. It provides insights into the growth trajectory of ESG funds on a global scale since 2014.

Behind the data

At the beginning of 2019, there were around 300 operating ESG funds. By January 2024, this number surged to over 1,800, highlighting substantial and rapid growth in the availability of investment options dedicated to ESG principles. This reflects the increased investor interest in sustainable and socially responsible investing in the wake of the pandemic.

However, the net flows tell a more nuanced story. The peak of ESG-oriented investing occurred around January 2021, after which asset owners and portfolio managers began withdrawing assets from ESG funds, possibly due to economic uncertainty and growing scrutiny over the actual impact of green investments.

Recently, there has been a new spike in net flows. Could this signal a revival in ESG? 

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