U.S. job market cools

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Seasonal weakness – will it manifest?

An old investor’s adage used to be “Sell in May and go away, come back on St Leger’s Day” (an annual horse racing fixture that falls in mid-September), as the summer months would be among the weakest for the equity market. 

It was true that, on average, performance tended to be weaker during those months – though capitalising on that was difficult because, as another idiom runs: “a six-foot man can still drown crossing a river that’s five feet deep on average” – a reminder to not underestimate risk.

In any given month of any given summer, there’s a chance that seasonal weakness might not manifest, which has proven to be the case. Over the last five years, global equities have risen each month from May to August, while September has stood out as the worst month of the year for equity returns. This shows how easily investors can tie themselves in knots trying to take advantage of seasonal trends, particularly if you can’t explain why seasonal moves occur.

Source: LSEG Datastream

Seasonal weakness in September isn’t just limited to equities; bonds have been suffering from it too. As a result, there have been fears of a debt crisis this year – a situation in which investors are reluctant to lend because they think borrowers are overly stretched. 

The explanation for this seasonal weakness is that during the summer when liquidity and investor attendance are low, companies tend not to try and borrow money in the bond market. Instead, they hold their borrowing back and try to fill it in September when there are plenty of investors around to meet it. 

This year was a good example of that. The first day back after the Labor Day holiday in the U.S. (which this year fell on 2 September) tends to mark the reopening of the debt markets. This year, Europe and the U.S. experienced their largest and third-largest day of borrowing ever, respectively.

Bonds rally

Once this wave of new borrowing was digested, bonds rallied over the rest of the week. It’s because demand for bonds has been so high that many corporate issuers are taking advantage of the relatively tight credit spreads.

In the UK, rising bond yields are incorporated into the Office for Budget Responsibility’s models, and increase the assumed cost of borrowing. This makes compliance with Chancellor Rachel Reeves’s fiscal rules more difficult and increases the need for spending restraint and, more critically, tax increases in the forthcoming Autumn Budget.

This year, the Autumn Budget will take place on 26 November, which is relatively late. This is presumably because it will allow more time for inflation to subside along with borrowing costs, which would reduce the pressure for tax increases. 

Meanwhile, French Prime Minister François Bayrou’s government collapsed after the prime minister lost a confidence vote on Monday. The ousting comes after the government failed to achieve sufficient support from the legislative chamber to pass a restorative budget. President Emmanuel Macron is likely to appoint a new prime minister, and the process will need to start again.

U.S. jobs growth slows

Like France and the United Kingdom, the U.S. also has an unsustainable budget deficit. But the latest set of employment data out of the U.S. provided further evidence that the jobs market is slowing and bolstered the case for an interest rate cut.

Source: LSEG Datastream

In addition to slower jobs growth, the average working week shortened, and hourly earnings slowed. That might seem bad news from a growth perspective, but lower interest rates are still considered good news for equity and bond investors alike.

Jobs growth slowed from 79,000 in July to just 22,000 in August, a mere month after President Donald Trump fired the previous head of the Bureau of Labour Statistics (which compiles the figures).

Coming up

• OPEC: The Organisation of the Petroleum Exporting Countries (OPEC) will release its oil market report and announce its latest production targets this week.
• European interest rates: Although an interest rate cut in the U.S. now seems very likely, the European Central Bank is almost certain to hold its interest rates in Thursday’s meeting.
• Inflation: U.S. inflation has been rising again as the economy absorbs the effect of tariffs.

The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk.