Minding the gaps

• When gaps open between variables that typically move together, we need to ask why.
• Despite uncertainty, the broader global macroeconomic backdrop remains supportive of markets.
• The most critical gap for most investors is the one between expectations and reality.

It is often said that nature abhors a vacuum. Meanwhile, financial and economic commentators distrust a gap. Whenever two variables that normally run together diverge, some explaining is required. Why did this happen, and what will cause convergence? Does one catch up, or the other catch down? Or are we witnessing a permanent misalignment?

If the latter, we are confronted with a case of “this time is different,” four words no investment professional utters lightly. Historically, many financial and economic data series show strong mean-reverting tendencies or persistent underlying trends. There are cycles, but these do turn eventually. That is the basis of using valuation as a framework for portfolio management, for instance, that cheap and expensive assets eventually drift back to fair value.

Jobless growth?
The divergence between US economic and employment growth is a recent example of such a gap, and also one that matters greatly to investors everywhere. The US economic and interest rate outlook remains the main driver of global market cycles. A US recession will pull global markets down, while an overheating economy can have a similar effect by leading to higher interest rates.

Growth in real GDP, the broadest measure of economic activity, was solid for most of 2025, though the fourth quarter was softer than expected due to the government shutdown. The economy grew 2.2% in 2025, but only added 181,000 new jobs on net, the slowest pace of job creation outside a recession this century. In contrast, 2024 saw 1.4 million jobs added. The first employment report of 2026 showed some improvement, but not strong enough to resolve the apparent contradiction between solid economic growth and weak jobs growth. Nor did the fourth quarter’s disappointing 1.4% annualised increase in real GDP.

In normal times, one would expect the gap to be closed by employment growth accelerating or GDP growth slowing further. Without job creation, it becomes difficult to sustain the aggregate growth in worker incomes needed to fuel broad-based consumption spending. However, these are not normal times.

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