Investing

Summertime madness


Our Top Market Takeaways for the week ending August 2, 2019.

 

THE WORD ON MARKETS

Summertime madness

Our two favorite market catalysts came to play this week. In the midst of what should be the dog days of summer, both the Federal Reserve and the Trump administration’s trade war with China roiled markets.

First, up: The Fed. Chairman Powell and the rest of the Federal Open Market Committee lowered interest rates for the first time since the Bush Administration on Wednesday. While markets seemed initially disappointed by Chairman Powell’s comments (more on this later), they digested the news by lunchtime on Thursday. Second, in the latest twist in the trade war saga, President Trump tweeted that the United States would place a 10% tariff on the close to $300 billion worth of currently un-tariffed imports from China. This means that there will likely be a tax on almost every good that is shipped from China to the U.S. by September, and the effective U.S. tariff rate on total imports will rise to levels not seen since the early 1970s.

The Fed and trade overshadowed a pretty notable week in U.S. earnings season. Apple’s earnings were lackluster, but the market shrugged it off. Shares rallied, as the company announced it’s expecting $61–$64 billion in revenues for the next quarter, above most analysts’ expectations. Unfortunately, the stock gave up most of its post-earnings gains on the trade news. iPhones are arguably the most high-profile import from China, and until now they’ve avoided tariffs. Healthcare companies Merck, Celgene and Eli Lilly all had impressive earnings reports, and Consumer Staples stalwart Proctor & Gamble reached an all-time high after its release.

By the end of the week, all major global stock markets were in the red. Asian stocks sank, with China’s onshore CSI 300 down -2.9% and Japan’s TOPIX losing -2.4% to finish the week. Heading into Friday, both the Stoxx Europe 600 (-0.8%) and S&P 500 (-2.4%) were lower, suggesting more volatility into the week’s close. The song was the same on a sector level: Defensive sectors Real Estate (+1.3%) and Utilities (+0.2%) saw gains, while those most levered to the business cycle, like Consumer Discretionary (-3.7%), Financials (-3.7%) and Industrials (-2.8%), took the brunt of the decline. Lastly, bond markets mirrored the trend, as U.S. 10-year Treasury yields fell over 20 basis points to 1.85% (the lowest since 2016).

We’ve covered our latest views on the trade war, the Fed, and some things for long-term investors to consider, so we thought we’d leave you with two annotated charts illustrating the summertime madness that the S&P 500 and U.S. 10-year Treasuries experienced this week.

SPOTLIGHT

A hawkish cut

As we expected, the Fed lowered interest rates on Wednesday. The 25 basis point cut, along with the end of balance sheet run-off, represents the completion of the Fed’s pivot from tightening mode to easing mode. (As a reminder, “easy,” “loose,” “accommodative” or “dovish” policy is designed to stimulate the economy, while “tight,” “restrictive,” or “hawkish” policy is designed to slow it down.) Importantly, Chairman Powell’s post-meeting press conference also jived with our view that this rate cut is designed to “fine tune” policy, rather than mark the beginning of an easing cycle.

We’ve noted that rates markets have been expecting a lot from the Fed, and the initial market reaction gave a taste of what disappointment could look like. Just two weeks ago, markets were suggesting the Fed would lower interest rates by 25 basis points four times over the next year. While the Fed delivered the first on Wednesday, during Powell’s press conference, markets moved briefly to only suggest two additional cuts (i.e., down from four to three in total over the next 12 months). Where did the other cut go?! Well, at the same time, the S&P 500 dropped by almost -2.0%, suggesting that Powell’s remarks were disappointing to stock market investors. All else being equal, lower interest rates should result in higher equity prices (a lower discount rate means that future earnings are more valuable). It seems like markets were grappling with the increased likelihood that interest rates will be higher in the future than they initially assumed.

By the end of the day on Thursday, stocks had recovered most of the decline, and fixed income markets (like U.S. 2-year Treasury yields) were little changed relative to where they were before the announcement (in part because Powell reiterated that the door to more cuts was still open). Going forward, our expectation that the Fed will lower rates once more this year would be a disappointment to markets. Why? Because the market is expecting more cuts (or even more accommodative policy) than we are.

This could be a headwind, but it isn’t all bad news. The Fed not giving markets exactly what they want is kind of like a parent not giving their kid extra cotton candy at the fair. Sure, that extra sugar may lead to an hour or two of fun, but the aftermath could be messy.

Of course, it’s hard to disentangle the relationship between trade tensions and the Fed’s next move. Given that the Fed has cited external factors as a reason to lower interest rates, it makes sense that an escalation of trade tensions would nudge it into a more accommodative direction. However, the degree to which the most recent escalation will show up in the data (which is what the Fed is watching) is unclear. At the very least, the escalation in trade tensions makes another cut this year seem all but certain.

It is difficult to overstate the importance of the Fed pivot (January 4, 2019–July 31, 2019). It drove outstanding year-to-date returns across asset classes, and reduced the friction between the cost of capital and expected returns, which ought to support the economy at large. While it is time to start living in the post-pivot world, it seems like trade and the Fed will continue to drive markets.

All market and economic data as of August 2019 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.

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 August 2019 and sourced from Bloomberg and FactSet 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. 

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. 

© 2019 JPMorgan Chase & Co. All rights reserved.


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

 

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.