Old telescope and blue sky. Shot taken in Como lake, Italy, Europe


Jacob Manoukian

U.S. Head of Investment Strategy

By: Jacob Manoukian and Alan Wynne

When following markets is your day job, you start to think that every single data point, every tick of price action, is the most important one.

The truth is that new information you get becomes part of a longer thread. Eventually those threads weave themselves into a full tapestry that creates our view of the larger economy and financial markets.

When you are paying attention every day, it is easy to track new information. But it can be harder to see the patterns that are forming over time.

This week, we tried to zoom out to see the larger trends that are forming through the first quarter of the year. Here is what stuck out.

1) The post-pandemic inflation surge is over

So far this year, investors have received 65 new inflation data points for the U.S. alone – about one per business day. The single most important one is the Personal Consumption Expenditure (PCE) Deflator, which is the Federal Reserve’s preferred measure of broad consumer prices. It is currently at 2.5%. This is down from the post-pandemic peak of over 7% in June of 2022 and almost exactly the median inflation rate since 1980. While inflation is still about 50 basis points higher than the Federal Reserve’s target, it has normalized in such a way that should allow it to lower interest rates a few times this year – a sentiment that Fed Chair Jerome Powell reiterated in a speech on Wednesday.

Line chart showing year-over-year headline U.S. PCE Deflator in percentages, from 1970 to 2024.

What is even more encouraging is that inflation is normalizing at the same time as the supply-side of the economy (the part that actually produces goods and services) seems to be adding capacity. Prime age labor force participation in the U.S. is at the highest levels since the early 2000s, helped by a surge in immigration. Every worker is also generating more output. Quarterly productivity growth has recovered to more normal levels after contracting during most of 2022. 

All of this suggests that continued growth may not lead to an unwelcome second wave of inflation. Good news, because…

2) Global growth is accelerating

…In 2023, the U.S. economy outperformed both economist expectations and most other regions around the world. So far in 2024, there are signs that U.S. growth is still strong and that growth in the rest of the world may start to accelerate.

Global economic data has been exceeding expectations at the highest rate in over a year, and the U.S. is still leading the way. Job growth in the U.S. has been 332,000 above expectations so far this year, purchasing manager surveys suggest that manufacturing activity seems to be expanding for the first time since 2022, and consumer sentiment is at the highest level since re-opening from the COVID-19 pandemic in the summer of 2021. The Atlanta Fed expects that first quarter gross domestic product (GDP) will come in at an above trend 3% pace. 

Line chart showing Citi Global Economic Surprise Index level from January 2023 through April of 2024.

In Europe, the stagnation that resulted from energy supply disruptions and price shocks seems to be over. Broad momentum and sentiment indicators such as manufacturing Purchasing Managers’ Indexes (PMIs), consumer confidence and business condition surveys are recovering. German economic expectations are at their highest levels since Russia’s invasion of Ukraine. If the European Central Bank is following the Fed towards lower interest rates, then that could solidify the growth rebound.

In China, domestic demand is still weak, but there are signs of strength in exports and factory output, while broader Asia should be supported by global technology capital investment. Latin American central banks are already easing policy rates to stimulate growth, and higher commodity prices (industrial metals prices are bouncing off of three-year lows) could support exporters.

3) Capital markets are thawing

The global central bank rate hiking cycle froze credit sensitive activity such as debt issuance, private equity deal flow, mergers and acquisitions (M&A) and turnover in the U.S. residential housing market. Now that investors and central banks feel that the rate hiking cycle is over, the spring thaw is underway.

Investment grade corporations issued $530 billion in new debt in the U.S. during Q1 of 2024, a record for first quarters. At the same time, all-in borrowing costs stayed relatively flat despite higher sovereign yields given robust investor demand. The fact that debt markets are coming back online suggests that both companies and investors are acclimating to this higher rate environment. While high yield issuance failed to reach a new high-water mark, it still doubled in the first quarter from the year before.

Chart showing Investment Grade and High Yield gross issuance in billions USD from 1Q 2010 to 1Q 2024.

Similarly, North American M&A volumes have surged over 75% from a year ago and U.S. residential housing inventory for sale has been expanding for 20 weeks in a row. In the residential housing market specifically, more available supply should mean more transactions, while also keeping prices in check.

Investor sentiment has also turned a corner. Investor surveys suggest that bulls haven’t outnumbered bears by this degree since the end of 2021 and net inflows into developed world equity funds are already nearly $100 billion relative to a decline of over $20 billion at this time last year.

Activity in credit intensive sectors started to thaw just because central banks signalled that it would be time to lower rates soon. A swing factor for 2024 and beyond is how responsive those sectors will be to rate cuts actually being realized.

Investment implications: Embrace the rally

The backdrop for investment portfolios is constructive. Inflation is falling, but not too fast. The supply side of the economy is improving. Global growth is accelerating after a challenging period, and capital market activity is picking up. The precedents for equity performance during rate cutting cycles outside of recession are clear: on average, the S&P 500 rallies in excess of 30%.

We expect diversified investment portfolios to continue to perform well in 2024, but it likely won’t be without some turbulence along the way. Investors have jitters around rising commodity prices, while geopolitical tensions and elections often cause bouts of volatility. We would note that the average calendar year since 1980 has seen a peak-to-trough decline in the S&P 500 of around -14%. It would be odd if we didn’t have a correction of a similar magnitude at some point. For reference, the current sell-off is a modest -2%.

While elevated valuations may give some investors pause, we would note that we expect performance to broaden to areas where valuations are less elevated, including U.S. small and mid-cap stocks and European equities. Investment grade fixed income yields of close to 5% give investors a decent coupon with a powerful buffer in case growth does weaken materially. Bonds are set to do their jobs in investment portfolios.

Your J.P. Morgan advisor can help design the right portfolio for you and your family to embrace the rally.

All market and economic data as of 04/05/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

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Index definitions:

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