November Wrapped

Our Top Market Takeaways for December 2, 2022

MARKET UPDATE

November Wrapped

Historically, the month of November tends to be a strong one for the equity market. This year was (perhaps surprisingly) no different.

Inspired by Spotify’s Wrapped week, we welcome you to markets’ November Wrapped. Last month in markets:

• Stocks ventured higher: The S&P 500 rallied over +5% – well above its historical November average of +1.8% –  in response to signs of cooling price pressures and a Fed that is likely to be nearing the end of its tightening cycle.
• All major U.S. indices are up, but one rules: The Dow has now risen more than +20% from its lows, putting it back in a “bull market” (if you use that definition) while the S&P 500, NASDAQ 100, and Russell 2000 are a lesser +13-14% above their respective lows.
• Your top sectors: Materials +11.5%, Industrials +7.6%, and Communication Services +6.9%.
• One index’s 2022 performance has layers, like an onion: Chinese equities are now near 30% from recent lows in response to reports over the past weeks suggesting a potential re-opening.
• Time to meet the yield curve’s November personality: recessionary. Treasury yields fell notably across the curve. The spread between 10-year+ and 1-3 year global bond yields tuned negative for the first time in at least two decades (as far back as the data goes).
• We liked this so much, we put it on a cover of a magazine (…kind of): Core bonds are working. The Bloomberg Global Aggregate Bond index generated a total return of 4.7% in November – the best month of performance for global core bonds since the Global Financial Crisis. 

• Oil has kept things interesting: Brent crude prices rose over +5%, but are still trading around their lowest levels since Russia’s invasion of Ukraine (and within $10/bbl of where they started the year).  
• USD strength played again and again… until it didn’t. The dollar fell -5% off its peak – the largest monthly decline in over ten years.

It was a good month, but there’s no doubt that headlines will continue to swirl into year-end – whether they’re about central bank dynamics, inflation, potential recessionary fallout in labor markets, and more. We spend today’s note pulling out recent key data points as a preview to our Outlook 2023 publication coming next week.

SPOTLIGHT

Tying our views to the news

1.  The labor market is coming off the boil, but still pretty hot. The ADP private employment report came in well below expectations, and Challenger job cuts data revealed that layoffs more than doubled from October to November (coming in at nearly 77,000). The number of job openings has been falling from its all-time highs, and the comedown in the quits rate suggests that workers are decreasingly confident about being able to find a new job if they leave their current one.

The November nonfarm payrolls report reminded us however that the path may be bumpy. The economy added +263K jobs relative to expectations for +200K as wage growth ticked higher.

In our view, the labor market is likely to soften meaningfully heading into next year. This is a crucial piece of the inflation slowdown puzzle: Earlier this week, Powell noted that while higher rates have led to some “promising developments” (think: the housing market slowdown), a decline in wage inflation resulting from a weaker labor market will be instrumental in bringing inflation down convincingly. 

2.  The good? Disinflation seems to be broadening out. PCE inflation data released on Thursday was a bit lower than expectations, which seemed to be welcomed as “good enough” for markets to hold onto most of their post-Powell speech gains. 

The pace of goods price increases has been on a downtrend as consumer spending has shifted towards services, shipping costs have fallen ~70% from their peak, and commodity prices have cooled -35%. But what about the rest?

Within the services component, we’re encouraged by the weakening labor demand and declines in higher-frequency rental data from sources like Apartment List, which tends to lead the “formal” shelter inflation data.

In our view, recession is more likely than not in 2023. The silver lining is that we expect it to help inflation continue to cool.  

3.  Potentially historic core bond opportunities. As interest rates have risen, bond prices have been pushed lower: Over 90% of the investment grade bonds in the JPMorgan Investment Grade Corporate Index are now trading below par value, compared to 69% at the end of 2018 and 60% in 2008. 

Over the past few months, there has been a collapse in the percentage of companies in both the S&P 500 and Stoxx Europe 600 with a dividend yield greater than the average corporate bond yield. In other words, investors are more likely to receive a higher stream of income by purchasing a corporate (safer) bond rather than owning (riskier) equity. This hasn’t been the case in broad U.S. and European markets in over a decade.

In our view, investors are being offered the potential to reach their goals while taking less risk. The reset in valuations (higher yields, lower stock multiples) has led to what may be one of the most attractive entry points for a stock-bond portfolio in over a decade.

4.  In a fight to secure non-Russian energy, Germany and Qatar struck a long-term gas deal. The Persian Gulf State is reported to ship up to 2mm tons of LNG per year to Germany for at least 15 years starting in 2026. This would replace about 6% of German imports from Russia in 2021.

Elsewhere, the Biden administration granted Chevron a license to resume oil production in Venezuela after sanctions halted all drilling activity almost three years ago. The U.S. expects a shipment of 1mm barrels of crude by late December.

In our view, Europe’s reliance on Russian energy poses a critical risk, and should also catalyze an investment cycle in a reimagined energy infrastructure. This creates opportunities for investors across real assets.

5.  A changing of the cap guard. The past decade in the stock market has been driven by massive growth companies. But this year, the stalwart mega caps have significantly underperformed the broader market: the S&P 500 -14% relative to AAPL -16%, MSFT -24%, GOOGL -30%, AMZN -43%, and META -64%. In fact, the market cap of Meta is now at a level below that of old economy Exxon (+81%).  

In our view, we’re likely to see a change in leadership as small- and mid-cap equities, which are both pricing in recession and have stronger growth potential, outperform their large cap peers. The steep discount serves as an opportunity to consider harvesting losses and rotating portfolios into equity assets that are expected to provide potentially better returns.

Your J.P. Morgan team is here to help you understand these insights – and our outlook for the year ahead – in the context of your financial plan.

All market and economic data as of December 2, 2022 and sourced from Bloomberg and FactSet unless otherwise stated.

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.

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

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.
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• 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.