What’s Driving Market Swings and What It Means for You

This year’s market has been all over the place. It started strong with a big wave of excitement around Artificial Intelligence, which led to a surge in tech stocks. But as reality set in, people began to question whether all that money being funneled into AI would deliver returns anytime soon. That uncertainty cooled off the hype, leading to some sharp swings.

Then in August, we saw a bump in the U.S. unemployment rate, which set off alarm bells and revived recession fears. The reaction was swift—investors began pricing in deep rate cuts from the Federal Reserve, similar to what we’ve seen in previous recessions. But the story isn’t quite that simple. This is not your typical economic cycle, and the reasons behind these movements are more complex than they appear.

What’s Really Happening?

The rise in the unemployment rate wasn’t caused by massive layoffs or a big drop in economic activity. Instead, it was driven by an expansion in the labor force, largely due to a spike in immigration. When more people start looking for work all at once, the unemployment rate can go up temporarily—even if businesses are still hiring.

In fact, the job market remains relatively strong, which the latest data confirmed when the unemployment rate fell back down. With wage growth cooling off, inflation has been coming down too. That’s why markets have shifted their expectations—investors no longer see the Fed slashing rates aggressively as they did earlier in the year.

What This Means for Investors

This is where things get interesting. The immediate outlook looks relatively solid because of cooling inflation, strong job growth, and stable corporate earnings. Analysts are forecasting that tech earnings will grow by 20% over the next year, with other sectors expected to show a healthy 8% increase. It’s one reason we’re still seeing confidence in U.S. stocks on a six- to twelve-month horizon.

But beneath this seemingly positive surface, there are structural forces that could create more uncertainty down the road.

The Bigger Picture: Demographics and Inflation

One of those forces is demographics. Right now, immigration is boosting the labor supply, offsetting some of the pressures caused by an aging population. But this trend won’t last forever. When immigration returns to its normal pace, we’re going to feel the impact of a shrinking workforce more acutely. Fewer workers can drive wages up again, putting renewed pressure on inflation.

If that happens, we could see the Fed back in a position where they need to tighten policy again, and that’s something to keep on the radar for the longer term.

How to Position in a Shifting Landscape

So what should you make of all this? In the short term, the resilience of the economy is a positive. But the fact that we’re not in a traditional business cycle means that sudden swings and surprises are likely to continue. The same goes for geopolitical risks, as recent developments in the Middle East have shown. So far, the market impact has been muted, but any escalation could change that in a hurry.

For bonds, the old playbook doesn’t work as well in today’s environment. Inflationary pressures can make long-term bonds more volatile, so we’re focusing on high-quality, income-producing bonds, particularly in regions like Europe where the spreads aren’t as tight. And in the U.S., medium-term bonds are starting to show more value now that markets are cooling off on deep rate cut expectations.

Positioning for the Long Term

Looking ahead, sectors like infrastructure and private credit are starting to stand out as areas that could benefit from long-term demographic and structural shifts. But keep in mind, these investments can be more complex and come with unique risks, so they’re not for everyone.

The Bottom Line

Markets are going to remain volatile as we head into the fourth quarter, but that doesn’t mean you should panic or make knee-jerk changes to your strategy. Keep your eye on the long-term trends and make sure your investment approach aligns with where you want to be years down the road—not just next quarter.

If you’re unsure about what to make of all this, feel free to reach out. These are the moments where having a clear, well-thought-out plan can make all the difference.

Source: BlackRock Weekly Commentary