Markets and Economy Markets balk at a strong US jobs report
With inflation concerns prevalent, markets didn’t appreciate the strong December US jobs report, but was the initial response an overreaction?
January 10, 2025
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Portfolio Playbook: Stable growth
In January, we’re still favoring bonds and quality US stocks. Optimize your portfolios with our monthly outlook and allocation guidance.
Leading economic indicators are suggesting stable but below-trend growth.
Growth remains broadly stable around the world, suggesting that the intermediate-term backdrop for risk assets remains favorable. However, our barometer of global risk appetite, which modestly improved over the past month, is yet to flag a sufficient rebound and inflection point in the cycle.
Market trades based on the US election have begun to lose momentum and unwind earlier gains. It’s reminiscent of what happened after the 2016 election, when markets focused on newer and potentially more consequential developments. Also, the December Federal Reserve meeting was a noticeable break in the prevailing expectation for a long, gradual easing cycle. The primary driver of markets is likely shifting from expectations for increasingly accommodative policies to cyclical macro indicators, which means the sensitivity of stock and bond markets to economic data, both growth and inflation, is likely to increase.
Our portfolio positioning hasn’t changed this month. In stocks, we’re overweight defensive sectors with quality and low volatility characteristics, tilting towards larger capitalizations at the expense of value and mid- and small-caps. For bonds, we’re underweight credit risk and overweight duration, favoring investment grade and sovereign fixed income over high yield.
Business cycle
- Recession doesn’t appear imminent.
- Stable consumption and tight credit spreads aren’t consistent with significant activity deterioration.
Market sentiment
- Leading economic indicators suggest stable, below-trend growth.
- Global risk appetite improving but not suggesting an inflection point.
Policy implications
- Inflation appears contained.
- Forthcoming future rate cuts, but tempered expectation.
Business cycle
- Economy experiences “soft landing” as growth remains resilient and inflation contained.
Market sentiment
- Global economy climbs to above-trend rate, driven by fiscal expansion.
- Risk-on sentiment returns as investors look to reinvigorated economy.
Policy implications
- Inflation remains contained.
- Fed eases policy amid a strong growth environment.
Business cycle
- Lagged effects of policy tightening more severe than expected.
- Prolonged recession emerges.
Market sentiment
- Leading economic indicators meaningfully deteriorate.
- Flight to quality as economy deteriorates.
Policy implications
- Fed lowers rates rapidly, below perceived neutral rate.
Asset allocations to consider:
In January, we’re still favoring long-duration bonds and high quality US stocks.
A challenge for tactical investors is preparing for the expected and anticipating the unexpected. The tactical asset allocation (TAA) framework from the Invesco Solutions team is designed to enhance a long-term strategic asset allocation (SAA) by making portfolio tilts based on near-term market views.
The tactical, dynamic factor rotation shown below is also utilized in the Invesco Russell 1000® Dynamic Multifactor ETF (OMFL).
About our allocations
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The Invesco Solutions team develops portfolios for client-oriented outcomes over multiple time horizons. Our tactical asset allocation (TAA), regime-based framework dynamically adjusts exposures to asset classes, regions, sectors, and factors, to create multi-asset portfolios designed for the prevailing macroeconomic environment. Strategic asset allocation (SAA) positioning is derived from our rigorous investment process, which consists of long-term capital market assumptions (CMAs), portfolio optimization, and risk management.
About our allocations
-
The Invesco Solutions team develops portfolios for client-oriented outcomes over multiple time horizons. Our tactical asset allocation (TAA), regime-based framework dynamically adjusts exposures to asset classes, regions, sectors, and factors, to create multi-asset portfolios designed for the prevailing macroeconomic environment. Strategic asset allocation (SAA) positioning is derived from our rigorous investment process, which consists of long-term capital market assumptions (CMAs), portfolio optimization, and risk management.
About our allocations
-
The Invesco Solutions team develops portfolios for client-oriented outcomes over multiple time horizons. Our tactical asset allocation (TAA), regime-based framework dynamically adjusts exposures to asset classes, regions, sectors, and factors, to create multi-asset portfolios designed for the prevailing macroeconomic environment. Strategic asset allocation (SAA) positioning is derived from our rigorous investment process, which consists of long-term capital market assumptions (CMAs), portfolio optimization, and risk management.
Additional resources
Explore further research and analysis from our market and investment experts.
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The opinions referenced above are those of the author as of January 2025. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.
Tightening is a monetary policy used by central banks to normalize balance sheets.
There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply. The Fund's return may not match the return of the Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.
Growth stocks tend to be more sensitive to changes in their earnings and can be more volatile.
A value style of investing is subject to the risk that the valuations never improve or that the returns will trail other styles of investing or the overall stock markets.
Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.
Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.
Credit spread is the difference between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating.
Alternative products typically hold more non-traditional investments and employ more complex trading strategies, including hedging and leveraging through derivatives, short selling and opportunistic strategies that change with market conditions. Investors considering alternatives should be aware of their unique characteristics and additional risks from the strategies they use. Like all investments, performance will fluctuate. You can lose money.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
Junk bonds involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic, and political conditions.
Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer’s ability to make payments of principal and/ or interest.
An investment in emerging market countries carries greater risks compared to more developed economies.
