Investing

Desperate times call for desperate measures

If the economic data is so dire, why are markets rallying?


Our Top Market Takeaways for March 27, 2020.

Spotlight

Desperate times call for desperate measures

After a -2.9% slump on Monday, the S&P 500 mustered a whopping +17.6% gain over the past three days (its strongest gain over a comparable period since 1933). Previously plagued sectors like airlines (+34), automobiles (+30%), and oil & gas (+30%) were standouts. Meanwhile, U.S. Treasury yields held steady, and investment grade and high yield spreads made a historic recovery.

Dominating headlines and fueling optimism was the progress of an unprecedented $2.2 trillion fiscal support package from the U.S. government. It was unanimously passed in the Senate earlier this week, but it’s not law just yet—it seems likely to be passed by the House and on the President’s desk by the weekend. Combined with other measures passed earlier this month, the U.S. fiscal response to the COVID-19 crisis adds up to over 10% of GDP—that far exceeds the government’s response during 2009, which, at roughly $800 billion, tapped in at around 5.4% of GDP. Yesterday, our team wrote an overview of the key provisions of the bill, and shared our thoughts on why we think it could steer the U.S. economy away from the “worst-case scenario.” And, of course, all this adds to the “bazooka” the U.S. Federal Reserve delivered, which has provided support to markets and the economy at large by cutting interest rates and pumping cash into debt markets.

We think that policy action of such scale is warranted, given the unprecedented disruption caused by the virus and containment efforts. Desperate times call for desperate measures. We’re starting to see data roll in that shows what markets had already been fearing for weeks: The economic impact of COVID-19 is very real, and it’s ugly.

The most notable example is the historic spike in U.S. jobless claims, or the number of U.S. workers applying for unemployment benefits. After the prior week saw the largest spike in claims since Hurricane Sandy eight years ago, the latest report saw the largest surge in history. More than 3.28 million people filed jobless claims last week (crushing the prior record of 695,000 in 1982). This goes to demonstrate a key distinction our colleagues pointed to in their piece yesterday: There is a very meaningful difference between the latest U.S. fiscal package providing much needed support to the economy and outright stimulus to kickstart a growth recovery.

Line chart shows U.S. initial jobless claims from 1967 through 2020. The chart highlights that in 2020, 3.28 million workers filed unemployment claims, which is the highest level by far during this time period.

Line chart shows U.S. initial jobless claims from 1967 through 2020. The chart highlights that in 2020, 3.28 million workers filed unemployment claims, which is the highest level by far during this time period.

The fiscal package underway is hoped to keep a number of businesses from bankruptcy and get cash in the hands of those who need it most. But, as is being made clear from the data, businesses in the United States and around the world have already been forced to cut costs and lay off workers to make ends meet. (After all, no one knows how long the shutdown will last, and the financial clock—marked by interest payments, rent payments, utility bills, and so on—is still ticking.) With that said, it is very likely the unemployment rate will still rise into the double digits (at 3.5% before the outbreak occurred). Recovering from such an unprecedented decline in employment is no small feat, and it will take a while for the labor market to heal once we get to the other side. All in all, the poor economic data this week is really the first notable example of rallying on “bad” news since the COVID-19 crisis began—a key milestone for finding a bottom.

But if the economic data is so dire, why are markets rallying? A few reasons.

  • A lot of bad news was already in the price. After the S&P 500 dropped -34%, the market has been expecting really ugly economic data. That said, a big chunk of selling pressure seems like it could be behind us. Most asset classes are still (or are close to) pricing in a recession, even after the rally.
  • There is clearly some initial enthusiasm for the fiscal stimulus package. By providing key support to states, businesses, plagued industries (like airlines), hospitals and individuals, there is a hope that the package that’s poised to pass will mitigate some of the overall economic toll.
  • We are seeing signs that the Fed’s efforts to ease the liquidity crunch are paying off, as credit markets have begun to stabilize. For example, the Fed announced that it will now buy investment grade debt, offering much needed support on the demand side of the fixed income market. Investment grade bonds have rallied significantly—their spreads over U.S. Treasuries have compressed by over 60 basis points since Monday, more than in any other week since the start of the J.P. Morgan JULI Index.
Line chart shows J.P. Morgan JULI U.S. Investment Grade Index spread to U.S. Treasuries from January 2019 through March 2020. The chart highlights that, in 2020, investment grade bonds had a massive selloff, which was closely followed by a historic recovery that started early this week.

Line chart shows J.P. Morgan JULI U.S. Investment Grade Index spread to U.S. Treasuries from January 2019 through March 2020. The chart highlights that, in 2020, investment grade bonds had a massive selloff, which was closely followed by a historic recovery that started early this week.

We want to be clear that the fiscal and monetary support isn’t a panacea for the stress in the investment landscape.

We expect there to be more demoralizing economic data ahead, and it’s likely volatility will persist. Ultimately, this is about stopping the COVID-19 outbreak, and containing its spread is going to be crucial to seeing a sustained recovery in the economy and markets broadly.

Michael Cembalest, our Chairman of Market and Investment Strategy, has been compiling an extraordinary body of work around this issue. Given the importance of the path of the virus itself, as well as its market and economic impact, we encourage you to explore Michael’s work here.

As we continue to navigate this global pandemic, please let us know how we can help. Your J.P. Morgan advisor is eager to help.

 

 

All market and economic data as of March 2020 and sourced from Bloomberg, FactSet and Gavekal unless otherwise stated.

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.
  • The prices and rates of return are indicative, as they may vary over time based on market conditions.
  • 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.
  • 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.

All market and economic data as of March 2020 and sourced from Bloomberg, FactSet and Gavekal unless otherwise stated.

The information presented is not intended to be making value judgments on the preferred outcome of any government decision.

This material is for informational purposes only, and may inform you of certain products and services offered by
J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Please read all Important Information.

  • The MSCI China Index captures large- and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). With 459 constituents, the index covers about 85% of this China equity universe. Currently, the index also includes Large Cap A shares represented at 5% of their free float adjusted market capitalization.
  • 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 index was developed with a base level of 10 for the 1941–43 base period.
  • The STOXX Europe 600 Index tracks 600 publicly traded companies based in one of 18 EU countries. The index includes small-cap, medium-cap and large-cap companies. The countries represented in the index are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Holland, Iceland, Ireland, Italy, Luxembourg, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

This material is for informational purposes only, and may inform you of certain products and services offered by
J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Please read all Important Information.

GENERAL RISKS & CONSIDERATIONS

Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g., equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan representative.

NON-RELIANCE

Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.

Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.  

IMPORTANT INFORMATION ABOUT YOUR INVESTMENTS AND POTENTIAL CONFLICTS OF INTEREST

Conflicts of interest will arise whenever JPMorgan Chase Bank, N.A. or any of its affiliates (together, “J.P. Morgan”) have an actual or perceived economic or other incentive in its management of our clients’ portfolios to act in a way that benefits J.P. Morgan. Conflicts will result, for example (to the extent the following activities are permitted in your account): (1) when J.P. Morgan invests in an investment product, such as a mutual fund, structured product, separately managed account or hedge fund issued or managed by JPMorgan Chase Bank, N.A. or an affiliate, such as J.P. Morgan Investment Management Inc.; (2) when a J.P. Morgan entity obtains services, including trade execution and trade clearing, from an affiliate; (3) when J.P. Morgan receives payment as a result of purchasing an investment product for a client’s account; or (4) when J.P. Morgan receives payment for providing services (including shareholder servicing, recordkeeping or custody) with respect to investment products purchased for a client’s portfolio. Other conflicts will result because of relationships that J.P. Morgan has with other clients or when J.P. Morgan acts for its own account.

Investment strategies are selected from both J.P. Morgan and third-party asset managers and are subject to a review process by our manager research teams. From this pool of strategies, our portfolio construction teams select those strategies we believe fit our asset allocation goals and forward-looking views in order to meet the portfolio’s investment objective.

As a general matter, we prefer J.P. Morgan managed strategies. We expect the proportion of J.P. Morgan managed strategies will be high (in fact, up to 100 percent) in strategies such as cash and high-quality fixed income, subject to applicable law and any account-specific considerations.

While our internally managed strategies generally align well with our forward-looking views, and we are familiar with the investment processes as well as the risk and compliance philosophy of the firm, it is important to note that

J.P. Morgan receives more overall fees when internally managed strategies are included. We offer the option of choosing to exclude J.P. Morgan managed strategies (other than cash and liquidity products) in certain portfolios.

The Six Circles Funds are U.S.-registered mutual funds managed by J.P. Morgan and sub-advised by third parties. Although considered internally managed strategies, JPMC does not retain a fee for fund management or other fund services. 

LEGAL ENTITY, BRAND & REGULATORY INFORMATION

In the United States, bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.

JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank-managed investment accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.

References to “J.P. Morgan” are to JPM, its subsidiaries and affiliates worldwide. “J.P. Morgan Private Bank” is the brand name for the private banking business conducted by JPM.

This material is intended for your personal use and should not be circulated to or used by any other person, or duplicated for nonpersonal use, without our permission. If you have any questions or no longer wish to receive these communications, please contact your J.P. Morgan representative. 

© 2020 JPMorgan Chase & Co. All rights reserved.