Investing
Positive signs emerge on inflation, but will it last?
Markets have been cheering the latest news, giving investors a chance to review portfolios—but the coast is far from clear.
Our Top Market Takeaways for August 12, 2022
Market Update: Price relief
The July Consumer Price Index data was a crescendo to a string of better news for investors. The closely watched inflation metric showed that there were not any price gains in July (compared with a 1.3% increase just last month), and even after stripping out food and energy costs, prices only rose by 0.3%.
Falling oil and gasoline prices had a big impact. Prices at the pump have declined for 57 straight days, and the national average is below $4 per gallon for the first time since early March. In all motor fuel costs fell by 7.6% on the month. Lower fuel costs also gave travelers some relief. Airfares fell 7.8%.
Lower energy prices should continue to flow through the supply chain. Indeed, global shipping costs are now down almost 40% from their peaks, and producer prices (which measure inflation facing businesses and manufacturers) was actually negative in July relative to June. All of this suggests that goods inflation should continue to fall over the next few months.
But it wasn’t just energy. The share of components within the CPI index that saw price declines was the highest since early 2020.
This CPI print is the latest (and most important) indicator that suggests price pressures have peaked. The pace of wage gains have cooled no matter which data series you look at, consumer expectations for future inflation are falling, and market-based measures of inflation remain anchored.
While all of this is encouraging, we aren’t out of the inflation woods. Prices are still much higher than they were a year ago, and core inflation of 0.3% per month still implies an annual pace of inflation well above the Federal Reserve’s target of ~2%. Housing costs continued to rise and will likely do so for a while longer. Food prices were up a staggering 1.1% in July and are now almost 11% higher than they were last year, posing a burden to many families.
We expect the Fed’s hiking cycle to continue until they see additional convincing evidence that inflation is moving back towards their target, even if the hikes are at a slower pace than the 75 bps moves we saw in July and August.
That said, markets are starting to sense a shift. The S&P 500 continued its rally from the June lows this week, the treasury yield curve steepened, and both high yield and investment grade credit spreads tightened. All three are signs that the Fed may not have to force a recession to cure inflation after all. Further, the assets that have been at the epicenter of this current bear market, like the ARKK Innovation ETF (~+50%) and the NASDAQ Composite (~+20%) are well above their lows. Investors shouldn’t let their guard down, but we do see more signs that we may be through the worst of the bear market (absent a recession).
At least, July’s 528k job gain coupled with no inflation showed that a soft landing is still very possible.
Investment Implications: Taking stock of your plan
The summer stabilization could give you an opportunity to take a look at your portfolio on a holistic basis. Through all of the day-to-day volatility in markets and uncertainty over economic data, we seek to build portfolios that allow investors to reach their financial goals with an appropriate amount of risk. The late summer could provide an ideal time to reflect on the market volatility that we saw over the first 7 months of the year and think about whether your portfolio still matches your own risk tolerance.
You may also have time to update your goals-based plan. Doing so can help you understand how your portfolio may react to the potential bouts of market volatility ahead, and determine whether or not you are still on track to meet your goals.
We are using the time to take stock of our views on markets. In equities, we are making sure that we have a proper balance between sector, style, size and geography. Further, we are exploring the best ways to hedge exposures through options, structured notes or managed strategies in an effort to add more certainty to potential outcomes. In fixed income, we still think that many parts of bond markets provide an attractive entry point, especially for those looking for a buffer against potentially adverse economic outcomes given the amount of tightening that has already taken place.
As always, we are looking for opportunities. Structured equity in dislocated sectors and preferred equities are currently in focus, and we continue to work on small and mid-cap equities, which are trading at historic discounts relative to large cap, and well below their own averages.
Hopefully you find some time to rest and relax over the next few weeks before what ought to be an eventful autumn.
All market data from Bloomberg Finance L.P., 8/11/22.
All market and economic data as of August 12, 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.
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.
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.
This material is for information 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”). The views and strategies described in the material may not be suitable for all investors and are subject to investment risks. Please read all Important Information.
- 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.
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/diversification 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 team.
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.
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 JPM. Products not available in all states.
© 2022 JPMorgan Chase & Co. All rights reserved.