Investing

Rotation from the winners to the losers

It could be a week to remember for the bulls—is a great rotation underway?


 

Market Update

The great rotation?

Just when you thought the week was almost over, U.S. stocks broke their three-day winning streak and slumped on Thursday. U.S.-China tensions flared once more as President Trump hinted that measures against China could be announced at a press conference later today. Further, social media firms took a hit as Trump signed an executive order that would limit their liability protections for users’ posts. In Minnesota, and across the United States, demonstrations following the death of George Floyd intensified.

If stocks can hold on to their gains (+2.5% heading into the session on Friday, and trading above the psychologically and technically important level of 3,0001) in the face of these new risks, it could be a week to remember for the bulls. At the beginning of May, we wrote about concentration in the “Big 5” (Microsoft, Apple, Amazon, Alphabet, Facebook). Investors worried that the concentration was a sign of a fragile market. If those Big 5 “secular growers” cracked, they would bring the whole market down with it. We also wrote that the “good” way for it to reconcile is if all the laggards (cyclicals, financials, energy, etc.) caught up as the economic recovery exceeded expectations. That started to happen this week. Check out the performance of some of the recent social distancing “winners” and “losers.”

Forgive the jargon, but the stuff that hasn’t been working ripped. Over the last week, “value” stocks (the ones that look the cheapest) outperformed “momentum” stocks (the ones that have been going up recently) by over +4%. Small caps were up by +3%. The Brazil ETF (EWZ) was up over +9%! The worst COVID-19 outbreak in the world right now is in Brazil.

What is the market signaling? Well for one, the divergence between the secular growth segments of the market and the more cyclical parts of the market was extremely stretched. Any hint of marginally better than expected news can result in rapid changes as investors seek more direct exposure to underlying economic growth. Even with the new risks, there are more and more reasons to be cautiously optimistic.

So far, a second wave hasn’t materialized in any of the U.S. states or European countries that have been reopening for almost a month. In South Korea, the nightclub spike seems to have been a one-off event. Real-time consumer spending in the United States continues to normalize. Further, corporate debt issuance has surged to record levels. Credit is oxygen for the economy, and right now, its flow seems quite healthy.

We still believe in the secular growth trends that we have written about many times over the last year, but it is also clear that having some cyclical exposure in equity portfolios seems prudent at this time.

 

Spotlight

This week in policy
 

The policy response has been a key factor for the market’s rally from the bottom two months ago. This week, we got more clarity from China and Europe (the second- and third-largest economic blocks in the world). Here’s what you should know, and our take on how it might move markets.


1. A number of key developments came from the National People’s Congress (NPC), China’s most important annual policy meeting. Investors always keep an eye on the NPC because the policy decisions tend to have substantial economic and geopolitical implications, and the COVID-19 crisis makes this year’s meeting all the more important.

What you should know:

  • China’s stimulus measures are likely to be less robust than expected. For the first time, China will not have a pre-set numerical growth target for the year, signaling continuation of the conservative, prudent policy stance.
  • The phase one trade deal seems safe, at least for now. While a recent uptick in combative rhetoric has cast doubt over the “phase one” trade deal between the United States and China, Chinese leaders used the NPC to re-emphasize their commitment to the deal.
  • Hong Kong will likely become a hotspot amid rising U.S.-China tensions. A draft resolution of a new Hong Kong Security Law was released at the meeting, paving the way for changes to Hong Kong’s Basic Law (the city’s mini-constitution). Details of the law are still unclear, but in particular we are watching how it will be implemented (i.e., whether Beijing uses the law to directly intervene in Hong Kong’s law enforcement and judicial affairs); how the United States responds (the White House is expected to announce some measures against China today); and the extent to which social unrest develops.

Our take: China seems to be focused on a sustainable domestic recovery rather than the kind of blunt stimulus that catalyzed a global cyclical resurgence in 2016 and 2017. Geopolitical concerns (both on trade and Hong Kong) will be at the fore over the next few months, and the range of possible outcomes on each is wide. Our best advice to investors in dealing with that uncertainty is diversification using active management. Many attractive secular trends are present in China and across Asia, and we prefer to work with managers who are experts in the space.


2. At long last, there is a recovery fund proposal for Europe. This week, the European Commission came through with its official proposal, amounting to €750 billion of support for the European Union (EU), divided between €500 billion in grants (in line with the Macron-Merkel proposal touted last week) and up to €250 billion in loans to countries worst hit by the crisis. To create the fund, the EU itself will raise €750 billion from capital markets.

What you should know:

  • The proposal doles out funds based on need, rather than size of the country—More heavily impacted and high-debt-laden countries like Italy, Spain and Greece are net receivers, while wealthier member states like Germany, France, the Netherlands and Sweden are net contributors and thus smaller beneficiaries.
  • It marks the first time that there is a real willingness and push for member countries to coalesce around a unified fiscal policy for Europe (acting as a sum of parts, rather than mismatched pieces of a puzzle).
  • It’s still just a proposal, and its passage will take some time, given it requires the approval of all 27 EU member states. It could take several months to reach an agreement, and funding won’t come through until 2021, given the proposal is attached to the EU budget, which runs from 2021 to 2027.

Our take: There’s no guarantee that fiscal unity will become a mainstay, but the actions so far have already set a precedent that cooperation is possible—a development euro investors have pined after for years. If fully enacted, it could be positive for all euro-denominated assets. 

As investors follow the progress of the European recovery fund, they will also be keen to see what Congress has up its sleeve. Most investors expect another major fiscal package to become law later this summer. It will likely include support for municipal governments, as well as an extension of some of the augmented unemployment insurance benefits that were central to the CARES Act.

The coordination between governments and central banks has been a powerful tailwind to markets, and we expect it to continue in the near term.

 

Culture

Sports!
 

The NHL2 is the first major U.S. sports league to announce its return. Assuming everyone involved passes medical tests, two cities would host a 24-team playoff tournament sometime after July 1, with the Stanley Cup presented to the champion in early fall.

Similarly, there seems to be momentum building for the NBA to resume its season at Walt Disney World this summer, and there is increased optimism surrounding the college and professional football seasons in the fall as well.

Around the world, the English Premier League is scheduled to restart its season on June 17, and Korean baseball and German topflight soccer (football? futbol? fußball?) are already back in action.

The world is getting started again, slowly.

New York Rangers goaltender Henrik Lundqvist (30) makes a first period save on a shot by Boston Bruins center Charlie Coyle (13). The Boston Bruins host the New York Rangers in a regular season NHL hockey game at TD Garden in Boston on March 27, 2019.

(Photo by Barry Chin/The Boston Globe via Getty Images)

New York Rangers goaltender Henrik Lundqvist (30) makes a first period save on a shot by Boston Bruins center Charlie Coyle (13). The Boston Bruins host the New York Rangers in a regular season NHL hockey game at TD Garden in Boston on March 27, 2019.

 

All market and economic data as of May 2020 and sourced from Bloomberg and FactSet 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.All market and economic data as of May 2020 and sourced from Bloomberg and FactSet 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.

 


1. What is it with 3,000? Maybe it is just such a clean number. Only 32 players in Major League Baseball history have over 3,000 hits. The S&P 500 has closed above 3,000 only 110 times. 
2. As you all know, TMT stans Joe Thornton, whose San Jose Sharks were officially eliminated from contention in the tournament yesterday. Through his career, Thornton has lost one full season due to a work stoppage, another half-season to work stoppage, and major chunks of other seasons due to two devastating knee injuries. Even still, the criminally underrated centerman ranks 7th all-time in assists and 14th all-time in points.

 

 

 

 

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 May 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.

In Luxembourg, this material is issued by J.P. Morgan Bank Luxembourg S.A (JPMBL), with registered office at European Bank and Business Centre, 6 route de Treves, L-2633, Senningerberg, Luxembourg. R.C.S Luxembourg B10.958. Authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg S.A. is authorized as a credit institution in accordance with the Law of 5th April 1993. In the United Kingdom, this material is issued by J.P. Morgan Bank Luxembourg S.A., London Branch. Prior to Brexit (Brexit meaning that the United Kingdom leaves the European Union under Article 50 of the Treaty on European Union, or, if later, loses its ability to passport financial services between the UK and the remainder of the EEA), J.P. Morgan Bank Luxembourg S.A., London Branch is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from us on request. In the event of Brexit, in the UK, J.P. Morgan Bank Luxembourg S.A., London Branch is authorized by the Prudential Regulation Authority, subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. In Spain, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Sucursal en España, with registered office at Paseo de la Castellana, 31, 28046 Madrid, Spain. J.P. Morgan Bank Luxembourg S.A., Sucursal en España is registered under number 1516 within the administrative registry of the Bank of Spain and supervised by the Spanish Securities Market Commission (CNMV). In Germany, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Frankfurt Branch, registered office at Taunustor 1 (TaunusTurm), 60310 Frankfurt, Germany, jointly supervised by the Commission de Surveillance du Secteur Financier (CSSF) and the European Central Bank (ECB), and in certain areas also supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). In Italy, this material is distributed by

J.P. Morgan Bank Luxembourg S.A., Milan Branch, registered office at Via Cantena Adalberto 4, Milan 20121, Italy and regulated by Bank of Italy and the Commissione Nazionale per le Società e la Borsa (CONSOB). In addition, this material may be distributed by  JPMorgan Chase Bank, N.A. (“JPMCB”), Paris branch, which is regulated by the French banking authorities Autorité de Contrôle Prudentiel et de Résolution and Autorité des Marchés Financiers or by J.P. Morgan (Suisse) SA, which is regulated in Switzerland by the Swiss Financial Market Supervisory Authority (FINMA).

In Hong Kong, this material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so request. JPMorgan Chase Bank, N.A., a national banking association chartered under the laws of the United States, and as a body corporate, its shareholder’s liability is limited. In Singapore, this material is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore. Dealing and advisory services and discretionary investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to you). Banking and custody services are provided to you by JPMCB Singapore Branch. The contents of this document have not been reviewed by any regulatory authority in Hong Kong, Singapore or any other jurisdictions. You are advised to exercise caution in relation to this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. For materials which constitute product advertisement under the Securities and Futures Act and the Financial Advisers Act, this advertisement has not been reviewed by the Monetary Authority of Singapore.

J.P. Morgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.

JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under U.S. laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.

This material has not been prepared specifically for Australian investors. It:

  • may contain references to dollar amounts which are not Australian dollars;
  • may contain financial information which is not prepared in accordance with Australian law or practices;
  • may not address risks associated with investment in foreign currency denominated investments; and
  • does not address Australian tax issues.

With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. We may offer and/or sell to you securities or other financial instruments which may not be registered under, and are not the subject of a public offering under, the securities or other financial regulatory laws of your home country. Such securities or instruments are offered and/or sold to you on a private basis only. Any communication by us to you regarding such securities or instruments, including without limitation the delivery of a prospectus, term sheet or other offering document, is not intended by us as an offer to sell or a solicitation of an offer to buy any securities or instruments in any jurisdiction in which such an offer or a solicitation is unlawful. Furthermore, such securities or instruments may be subject to certain regulatory and/or contractual restrictions on subsequent transfer by you, and you are solely responsible for ascertaining and complying with such restrictions. To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American country, without previous registration of such fund´s securities in compliance with the laws of the corresponding jurisdiction. Public offering of any security, including the shares of the Fund, without previous registration at Brazilian Securities and Exchange Commission–CVM is completely prohibited. Some products or services contained in the materials might not be currently provided by the Brazilian and Mexican platforms.

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.

Check the background of Our Firm and Investment Professionals on FINRA's BrokerCheck

To learn more about J. P. Morgan’s investment business, including our accounts, products and services, as well as our relationship with you, please review our  J.P. Morgan Securities LLC Form CRS and  Guide to Investment Services and Brokerage Products.

This website is for informational purposes only, and not an offer, recommendation or solicitation of any product, strategy service or transaction. Any views, strategies or products discussed on this site may not be appropriate or suitable for all individuals and are subject to risks. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor's own situation. 

This website provides information about the brokerage and investment advisory services provided by J.P. Morgan Securities LLC (“JPMS”). When JPMS acts as a broker-dealer, a client's relationship with us and our duties to the client will be different in some important ways than a client's relationship with us and our duties to the client when we are acting as an investment advisor. A client should carefully read the agreements and disclosures received (including our Form ADV disclosure brochure, if and when applicable) in connection with our provision of services for important information about the capacity in which we will be acting.

INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED
Equal Housing Opportunity logo

J.P. Morgan Chase Bank N.A., Member FDIC Not a commitment to lend. All extensions of credit are subject to credit approval 

“J.P. Morgan Securities” is a brand name for a wealth management business conducted by JPMorgan Chase & Co. (“JPMC”) and its subsidiaries worldwide. JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank managed 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.

Please read additional Important Information in conjunction with these pages.