US Energy Health sectors look beyond help for now

Fed easing hopes are rising as economic data deteriorate, but lower rates may not lift all boats

Markets remain in thrall to U.S. macroeconomic data after the latest let-down by a top-tier release, ahead of critical monthly jobs readings on Friday. The ISM’s index for the services sector fell to its weakest level in three years, whilst job growth in the business segment that employs most Americans hit its lowest in five years.

The stock market reaction was instant, though its worst extent was relatively short lived. Major Wall Street indices soon rebounded and Nasdaq, S&P 500 and the Dow Jones Industrial Average were slightly higher within an hour of the prints. Although the ISM’s purchasing managers index was weak, at 52.6 in September, it remains well above the ‘50’ dividing line below which economic contraction is denoted. Services jobs also continue to contribute to the overall employment market, according to the ISM’s gauge, which printed at 50.4, down from 53.1.

Nevertheless, the momentum of a possible downturn, as indicated by ISM readings, was sufficient to swing market rate cut expectations sharply higher. The CME’s FedWatch Tool now points to a 92.5% implied probability that the Fed will ease again on 30^th October compared to a 77% chance a day ago. Investors are therefore more convinced that the Fed will have to double down, even though policymakers signalled a probable pause following their 25 basis-point reduction last month.

As such, expectations of further monetary easing are playing a part to cushion sentiment in stock markets. That said, such expectations can only go so far. At the sector level of U.S. stock markets it is evident that concerns about global growth are combining with broader concerns to weigh some shares harder than the overall market.

For instance, investors in energy shares look to have been undercut by concerns that economic growth is slowing both in the U.S. and beyond, perhaps nudged along by uncertainty stemming from the Washington and Beijing’s trade dispute and its chilling effect. Such concerns are expected to damp demand, leaving the S&P 500’s Energy Sector as the worst-performing industrial gauge so far this year.

Similarly, health care has barely moved in 2019, with a 2% uptick, compared to the S&P’s 15% rise. The industry is a political football ahead of 2020 elections, with both Democratic and Republican hopefuls eyeing restrictions on pricing and more.

Generally speaking, industrial segments that under perform the broader market as widely as the oil and health sectors point to potential opportunities from reversion or momentum. Common sense should also factor though. Regardless of likely easier borrowing conditions, economic slowdowns or political and geopolitical impacts could keep certain shares relatively capped.

Normalised chart: S&P 500 sectors - year to date

Source: Bloomberg/City Index