Geopolitical risks and unemployment data concern investors

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Nov. 26 2019, Updated 12:55 p.m. ET

  • Geopolitical risk and worries about the economic outlook overseas have convinced otherwise optimistic investors to take a more guarded stance.
  • Stubbornly high levels of structural unemployment and wide gaps in incomes limit the universe of potential savers who can own stocks.

Market Realist – Geopolitical tensions in the form of the Ukraine-Russia (or RSX) conflict, unrest in Syria, and the worsening Ebola outbreak in Africa have dampened investor confidence. Over the past two weeks, developed markets indices (or URTH) (QWLD) decreased ~3.6%.

The economic outlook abroad seems to be bleak. The Eurozone (EZU) and Japanese (EWJ) economy are facing a slowdown. Japan hasn’t been able to recover from the consumption tax that the government issued in April. Economic growth stalled completely in the Eurozone. The European Central Bank (or ECB) announced the purchase of asset-backed securities to provide stimulus to the economy. This program is much like the quantitative easing program introduced by the Fed in response to the U.S. financial crisis (XLF) of 2008. It involves the purchase of ten-year Treasuries (or IEF) and mortgage-backed securities.

China PMI summary

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Market Realist – Concerns about the manufacturing climate in China (FXI) have been plaguing the markets as well. The manufacturing Purchasing Managers’ Index (or PMI) for China declined from 51.7 in July to 51.1 in August. The September PMI is largely unchanged from the August PMI. The graph above shows the summary for China’s PMI subindices over the past three months.

structural unemployment

Market Realist – The graph above shows how the level of job openings increased much faster than the number of people hired. The number of job openings almost tripled in the last three years. Hiring increased only by 5%.

According to Peter Orsag, a former White House economist, if hiring and job openings increased at an even pace, 500,000 additional new jobs could have been created every month. This would bring the U.S. economy back to the pre-crisis levels. A lag in hiring could point to more than a cyclical issue. The unemployment could be the result of a structural weakness.

Continue reading the next part of the series to understand why stock ownership seems to be static in the past decade—despite two stock market crashes.

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