Research and Publications
Email
Print|
|
Market Update: Fading supports?
November 2, 2009
Confirmation that the U.S. emerged from recession in the third quarter - GDP rose at a 3.5% annualized rate, its strongest in two years - was not enough to stop global stock markets from suffering their worst weekly decline (led by the financials, materials and small cap stocks, and notable for the material underperformance of emerging markets) since the March bottom. Over the past eight months, a slew of supports have carried risk assets steadily higher: central bank asset purchases and commitments to low interest rates, much improved credit conditions, easing job losses, government stimulus efforts, including home and car buying incentives and generally better-than-expected corporate earnings and economic data. But we may now be moving into a period in which a continuation of the uptrend will require some of these supports to firm as others begin to fade.
Notwithstanding last week's strong U.S. GDP number, a 3.6% drop in new home sales, a dismal consumer confidence report (which included a slump in the assessment of current labor market conditions to its lowest levels since 1983) and the first monthly contraction in personal consumption since April all capped a month of generally disappointing economic releases. Our proprietary economic surprise indicators for the U.S. and U.K. gave their worst readings since January and March respectively, with the Eurozone indicator also showing weaker than expected numbers for the month as a whole. Meanwhile, important stimulus measures are already running off and others are due to follow over the coming months. Last week, the Federal Reserve completed its $300 billion of Treasury purchases while the Bank of England essentially rounded out its £175 billion asset purchase program. And looking forward, the Bank of Japan has announced that it will stop buying corporate debt and commercial paper at year-end, while the Fed's $1.45 trillion of agency mortgage-backed securities and agency debt purchases (which has led to a sharp rise in issuance and narrowing in MBS spreads) will be completed by next March.
The underwhelming economic data and prospect of central bank withdrawal from asset markets may have rattled investor nerves, but we are still inclined to put the recent turbulence in the category of 'temporary correction' rather than anything more sinister. Despite the sell-off in equities, there was limited disruption in credit markets and the rally in the dollar was weak by comparison; a true revival of systemic concerns would have resulted in larger moves in these markets. And although unconventional monetary support may be waning, and some central banks are already beginning to tighten (the Norges bank became the third to hike last week, while the Hong Kong monetary authority and Reserve Bank of India announced new measures to curb excessive bank lending) it is unlikely that policymakers in the major economies will be in a hurry to tighten policy in the near future. The Fed typically waits until the unemployment rate has fallen convincingly before starting to raise interest rates, while the European central Bank and Bank of England are expected to remain on hold for at least the first half of next year. Meanwhile, this week is likely to see the U.S. Congress vote on extending both unemployment benefits and the first-time homebuyer tax credit, possibly extending it to a wider set of potential recipients.
But while it remains doubtful that policymakers will revert to policy restraint until economic conditions can tolerate it, it seems clear that investors need to see a revival in private sector activity (especially further gains in corporate profits and a return to job growth) to be convinced that the economic recovery can be sustained. We still expect employment growth to turn positive by early 2010 given the disproportionate extent to which employment was cut in the recession, and especially now that output is expanding again. But with sentiment clearly fragile, this week's U.S. ISM manufacturing survey and monthly employment report are likely to be critical determinants of the market's near-term direction. A material surprise in either direction should provoke a strong reaction.
-- Stu Schweitzer & Ehiwario Efeyini, Global Markets Strategists
For professional investors only. This document is intended solely to report on various investment views held by J.P. Morgan Asset Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. These views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.
The value of investments and the income from them may fluctuate and your investment is not guaranteed. Past performance is no guarantee of future results. Please note current performance may be higher or lower than the performance data shown.
J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., JPMorgan Investment Advisors Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.
© 2009 JPMorgan Chase & Co.