Our Top Market Takeaways for August 31, 2023

Spotlight: 3 principles to guide investors 

August slipped away. Summer has been a lot, but in all, the S&P 500 is up +8% since the start of June (and +17% so far this year), despite the similar surge in bond yields.

Investors seem to be more focused on a brighter outlook ahead. Optimism around a “soft landing” for the U.S. economy has been growing, inflation is cooling, some of the heat is coming out of the labor market, corporate earnings have been solid and firms are focusing more on the future with investments around AI, infrastructure and the like. Nonetheless, the volatility reminds us that risks remain – around the knock-on effects of higher rates, debt dynamics, China and the list goes on.

So after a summer of market swings, it’s important for investors to remain focused on what matters. Predicting where the market might be headed can be complex and overwhelming, but the real key to investing can be as simple as having perspective and sticking to your plan.

Today, we want to step back and share three of our favorite investing principles to guide us through the end of the year and beyond.

1) Know your toolkit: Each asset has a role to play

If you’re building a house (or an IKEA bookshelf), you need different tools to get the job done. Your portfolio is no different. Whether it’s cash, stocks, bonds or alternative investments, each asset has a distinct role to play – and they work together to achieve your long-term goals.

Cash: Everyone needs it – from paying for your morning cup of coffee to your down payment on that house. Many also often think of cash as a safe haven, or, when interest rates are high, as a source of income. But because of inflation, cash comes with a cost. This means that while cash is a critical part of just living life, it’s also important to think about how much you really need to hold, and what can be invested to achieve other goals. For instance, over the last 30 years, cash and short-term Treasury bills have barely kept the pace with overall inflation, and have failed to keep up with the cost of important goods and services such as gasoline, medical care and education.

Stocks: Owning equity means owning a stake in a company and its future. So when you own stocks, you tend to benefit from earnings growth as well as the dividends companies pay to reward you for being a shareholder. For instance, since 1991, earnings and dividends have contributed over 97% of the cumulative 2470% return for the S&P 500, with changes in valuation driving just under 3% of that total return. Over time, equities can provide the highest expected return and drive capital appreciation for your portfolio, but they also come with higher volatility.

Bonds: Fixed income provides stability. Because bonds offer you coupon payments over time, in addition to returning your initial loan amount, they help to reduce uncertainty and volatility in your portfolio. The risk is that the issuer does not pay you back, but defaults are exceedingly rare for investment grade debt (over 10 year periods, default rates have been around 2% for corporate bonds and less than 0.1% for municipal bonds). Overall, fixed income should deliver higher total returns than cash or inflation. It should also provide lower volatility than equities, but the potential for material capital appreciation is also lower.

Alternatives: Hedge funds, private equity, real estate and other real assets can provide beneficial characteristics to portfolios. Adding alternatives can potentially increase returns while reducing volatility – but they also might come with the cost of locking up your money for longer.

In all, each has a role to play, and diversification across asset classes is the key to consistent returns.

2) Volatility is normal: Don’t let it derail your plans

Investors should expect pullbacks – both big ones like 2022’s rout (which was the worst for U.S. stocks since the Global Financial Crisis), and small ones like we felt during March’s bank stress or this month’s summer dip.

But despite these selloffs, stock markets have rewarded long-term investors. The S&P 500 has suffered an average intra-year pullback of -14% over the past four decades, with 16 of those 44 years seeing even steeper losses. Yet the full-year return was positive in 33 of 44 years (75% of the time).

So while the “risk” for stocks is volatility, the reward comes with the “return” of long-term capital appreciation.

3) Maintain a long-run mindset

Over the short-term, assets have a wide range of possible outcomes. Over the long-term, we believe the possibilities are much more certain, offering the chance to recoup losses and continue building your wealth.

For example: While the return over any given² 12-month period has been as low as -41% and as high as +60%, a blend of stocks and bonds has not suffered an annualized negative return over any five-year rolling period throughout the past 70 years.¹

So even though markets can always have a bad day, week, month or even year, history suggests investors are less likely to suffer losses over longer periods – especially in a diversified portfolio. But that said, keep the time horizon of your goals in mind. If you need the money in a year, you should have a very different portfolio than if you don’t need the money for 20 years.

Above all, make a plan with intent

Often, one simple question is the most important and hardest to answer: What is the purpose of your wealth?

Do you need cash to feel comfortable? Do you need to invest in assets that boost your income? Are you more concerned with building wealth for future generations?

The things we want to do with money – our goals – are at the root of why we invest in the first place. Principles like the ones above can help increase the probability that investors achieve those goals.

Your J.P. Morgan advisor is here to ensure your portfolio achieves the intent of your wealth.

All market data from FactSet and Bloomberg Finance L.P., 8/31/23.

DISCLOSURES

Small capitalization companies typically carry more risk than well-established "blue-chip" companies since smaller companies can carry a higher degree of market volatility than most large cap and/or blue-chip companies.

International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in international markets can be more volatile.

Diversification does not ensure a profit or protect against loss.

The Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The MSCI World Index is a broad global developed markets equity benchmark designed to support: Asset allocation: Consistent, broad representation of the performance of developed equity markets worldwide, without home bias.

The Bloomberg Aggregate Bond Index or "the Agg" is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

The NYSE FANG+ Index is an equal-dollar weighted index designed to represent a segment of the technology and consumer discretionary sectors consisting of highly-traded growth stocks of technology and tech-enabled companies such as Facebook, Apple, Amazon, Netflix, and Alphabet's Google.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

RISK CONSIDERATIONS

• Past performance is not indicative of future results. You may not invest directly in an index.
• Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.
• The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to 'stock market risk' meaning that stock prices in general may decline over short or extended periods of time.
• The prices and rates of return are indicative, as they may vary over time based on market conditions.
• As a reminder, hedge funds (or funds of hedge funds) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.
• Structured products involve derivatives and risks that may not be suitable for all investors. The most common risks include, but are not limited to, risk of adverse or unanticipated market developments, issuer credit quality risk, risk of lack of uniform standard pricing, risk of adverse events involving any underlying reference obligations, risk of high volatility, risk of illiquidity/little to no secondary market, and conflicts of interest. Before investing in a structured product, investors should review the accompanying offering document, prospectus or prospectus supplement to understand the actual terms and key risks associated with the each individual structured product. Any payments on a structured product are subject to the credit risk of the issuer and/or guarantor. Investors may lose their entire investment, i.e., incur an unlimited loss. The risks listed above are not complete. For a more comprehensive list of the risks involved with this particular product, please speak to your J.P. Morgan team.
• Additional risk considerations exist for all strategies.
• The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
• Structured products are complex debt obligations of a corporate issuer the return of which is linked to the performance of an underlying asset. They are significantly riskier than conventional debt instruments and may not be suitable for all investors.
• Investment in alternative investment strategies is speculative, often involves a greater degree of risk than traditional investments including limited liquidity and limited transparency, among other factors and should only be considered by sophisticated investors with the financial capability to accept the loss of all or part of the assets devoted to such strategies.
• Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.

IMPORTANT INFORMATION

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

Bonds are subject to interest rate risk, credit and default risk of the issuer. Bond prices generally fall when interest rates rise. Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.