We no longer support this browser. Using a supported browser will provide a better experience.

Please update your browser.

Close browser message

Investing

5 dynamics impacting markets and your portfolio

A record slowdown in inflation, debt ceiling melodrama and more.


Our Top Market Takeaways for May 12, 2023

Market Update: Swirl

There was both bad and good this week, and stocks and bonds reflected the swirl.

On one hand, questions over the future of the future of regional banks remain, and debt ceiling frustration wears on. On the other, inflation shows meaningful signs of abating, with the Fed narrowing in on pausing its hiking cycle, and corporate earnings have overall been far better than feared.

To break it all down, today we share 5 dynamics moving the needle in markets – and what it means.

1. Headline inflation has decelerated for 10 straight months – a first in over 100 years.

Evidence of cooling inflation keeps on growing. This week’s read on Consumer Price Inflation (CPI) came in bang-on estimates – with both headline and core (ex-food and energy) prices increasing 0.4% on the month in April. That brought the year-over-year gauges to 4.9% for headline, 5.5% for core – still well above what policymakers are comfortable with, but a lot of progress from the highs of 9.1% and 6.6%.

It's also worth noting that just six months ago, almost 80% of the goods and services in consumers’ price basket were running at dangerously fast clip north of 6%. Today, that’s down to roughly 40%, while the percentage of components below a 3% pace continues to grow:

What’s more, at 5.00–5.25%, the Fed’s policy rate is now officially higher than inflation – yet another sign that policy is restrictive. All this together (decelerating inflation, tight credit conditions, and easing growth) should give the Fed the ammo it needs to pause at its June 14th meeting. Yet, a month is a long time in markets these days – and central bankers will also get another jobs report and CPI print before they get to that meeting.

2. Amid debt ceiling melodrama, markets are pricing more credit risk in the U.S. than some emerging markets.

The clock is winding down for policymakers to hammer out a deal. Treasury Secretary Janet Yellen has signaled the X-date (the date of potential default) could be as soon as June 1. With bipartisan compromise still out of reach, the cost of credit default swaps, which offer insurance against the probability of the government defaulting on its debt, has soared to record highs and is now comparable to emerging markets and even junk-rated countries. Treasury bill yields that mature around the X-date have also soared compared to those dated just a few weeks earlier or later.

Given the high stakes, we continue to believe Congress will get the job done – most likely by suspending the ceiling until this fall when budget negotiations also kick off. Nonetheless, crashing through the X-date is crashing through the X-date is still a risk, and even a scenario where the government keeps up its interest payments (but halts all other discretionary spending) to technically avoid default, would still have adverse economic and market implications.

3. But even with all the uncertainty, 2022’s pain is drifting away – stocks are now higher over the last 12 months.

U.S., Europe, and even Chinese stocks are in the green over the last year. Up until April, the S&P 500 had a negative year-over-year return for 12 months in a row – that’s only happened 8 other times since 1950.

While there’s never a guarantee of future returns (and we expect volatility in the months ahead), historically that’s boded well for stocks moving forward. In each of those 8 other times, the S&P 500 was up an average of 18% a year later.

All this jibes with our view that stocks are forward-looking machines, selling off last year in anticipation of weaker growth to come and setting the stage for stronger markets this year.

4. Call it a comeback – earnings expectations are moving higher again.

Dare we say again that this earnings season has been impressive. S&P 500 companies are expected to round out Q1 with a -2.5% slowdown in earnings, up from estimates for over -7% heading into the quarter. Assuming the rest of this season’s reports keep pace (only roughly 8% of companies are left), it would mark the biggest turnaround we’ve seen since COVID-times.

Even more impressive: a look under the hood shows that the median company has actually grown earnings by over 1%. And, after over six months of adjusting for a weaker outlook, expectations for future earnings have turned a corner and are rising.

5. Treasury bills now offer the same yield as investment grade bonds.

Earlier this week, 1-month Treasury bill yields caught up to investment grade bond yields for the first time on record – both are yielding around 5.4%. But while a yield that high for lower risk cash and cash-like instruments may look good now, we don’t think those yields will last. 

With the Fed’s hiking cycle at or nearly at its end, reinvestment risk is real. When a recession hits, the Fed tends to cut rates by about 300 basis points in the following year. Today, markets are pricing in about 150 basis points of cuts over the next 12 months, suggesting there’s more room for interest rates to fall from here.

That’s led investment grade and municipal bonds to meaningfully outperform rolling T-bills in environments like this in the past. Following the Fed’s last hike over the past seven cycles, U.S investment grade bonds have outperformed T-bills by roughly 14% on average (27% bond return vs. 13% in T-bills). Finally, with inflation still around 5%, the real yield on T-bills is pretty much flat right now.

Your JPMorgan team is here to discuss these insights in the context of your own portfolio.


DISCLOSURES

All market and economic data as of May 11, 2023 and sourced from Bloomberg and FactSet unless otherwise stated.

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.
  • 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.


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, JP MORGAN 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 Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment advisor, member 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. Certain custody and other services are provided by JPMorgan Chase Bank, N.A. (JPMCB). JPMS, CIA and JPMCB 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.