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Investing

So long, summer

Summer wasn’t exactly hunky dory for markets, but was it as bad as many investors expected it to be?


 

Our Top Market Takeaways for September 1, 2022

Season recap: So long, summer

Thinking back to Memorial Day, it felt like investors were bracing for the worst: Persistently hot inflation, dreadful second quarter earnings results, and more pain for markets. In the end, it wasn’t the easiest ride, but was it as bad as many people expected it to be?

Here’s our recap of the thematic developments U.S. investors navigated this summer.

Markets: A tale of two halves

Risk sentiment was sour as summer heated up. By the middle of June, a bear market had gripped the global stock market with widespread declines of more than -20% from the all-time highs where we started the year. With the 10-year Treasury yield hitting a decade-high 3.47%, core bonds were having their worst year of performance on record.

Then, markets found a bottom the day after the Fed delivered its first 75 basis point hike since the ‘90s with a side of hawkish messaging at the June FOMC press conference. From June 16 to now, investors have had a slight reprieve from negative returns via a notably broad-based risk asset rally led by equities’ growth complex. A better-than-feared Q2 earnings report season didn’t hurt (aggregate S&P 500 earnings per share (EPS) growth came in at 6.2% versus expectations of 4%).  

Granted, the past two weeks have seen a revival of volatility across stocks and bonds as markets gave up about half of their bear market rally gains…but at least the summer months are finishing off the lows.

Economic Activity: You say potato, I say potato

Get it? That was a “Are or are we not in a recession?” joke. Instead of debating semantics, let’s instead focus on what the data told us throughout the summer.

Economic growth is clearly slowing down, evidenced by the release of the U.S. gross domestic product (GDP) data in July that showed the second consecutive quarter of overall economic contraction. Excepting the broad-based halt at the onset of the pandemic, U.S. pending home sales have cratered to their lowest level since 2011. Goods-oriented activity has sputtered as replenished inventories meet a slowdown in demand, leading to negative surprises across some manufacturing and industrial sectors.  

The labor market, however, remains remarkably resilient. So long as the August payrolls report shows gains of at least 75,000 in August (consensus expectations are calling for 298,000), the U.S. economy will have added over one million jobs throughout the summer with an unemployment rate of 3.5%.  

That’s good news for the health of the consumer, but remains a tricky piece of the inflationary Rubik’s Cube.

Inflation: Changing with the weather?

In the month of June, economy-wide prices heated up 9.1% from a year before – the fastest rate of inflation since 1981. We won’t have data for August for a couple more weeks, but late summer has finally brought realized evidence that inflation is cooling heading into fall.

The drop in the Consumer Price Index (CPI) to a still hot, but better 8.5% year-over-year pace in July brought a sigh of relief, to say the least. To boot, inflation moderation was validated by July’s Personal Consumption Expenditure (PCE) report and other indicators.

For markets, and especially for the Fed, the key will be for the momentum to persist with consecutively lower prints in the months ahead – Fed Chair Jerome Powell made that clear in his Jackson Hole speech last week. Until then, we should take the Fed at its word about a continuation of hawkish policy.

For consumers, don’t sleep on the importance of something as simple as gasoline prices when it comes to perceptions of the economy as a whole.

Sentiment: You won’t break my soul

As U.S. gasoline prices hit an all-time high in June, U.S. consumer sentiment hit an all-time low. Since then, the cost of oil has fallen amidst rising recession risks and a slowdown in demand, pushing the national average price at the pump down by more than $1.50 per gallon (from $5.01 to $3.84). That’s helped buoy sentiment off its bottom. 

To be sure, the average American still doesn’t feel good, but they at least feel better than they did at the start of the summer. Per Google Trends data, searches about “recession” have waned. Per the American Association of Individual Investors’ Sentiment Survey, market bears are still outnumbering market bulls, but by far less than they did back in June (the most recent bull-bear spread came in at -14.7, versus -41.1 on June 24).   

The bottom line

Compared to the start of summer, it’s tough to say that investors have much more clarity on the macro outlook that will drive markets throughout the fall: The Fed is still talking tough on inflation, bond yields remain at or near cycle highs, and the world’s other major economies continue to face profound risks (i.e., war and an energy crisis in Europe, China’s property sector turmoil and COVID-19 struggles). That said, having had some time to process the risks we’re facing, investors in aggregate don’t seem to have the same sense of “impending doom” that they did a few months back.

Still, pervasive uncertainty lends itself to roughly even probabilities of where we go from here. As stewards of capital, that prompts us to continue to focus on more defensive tilts in the core portfolios we manage over the next year (e.g., an emphasis on core bonds, balanced exposures across higher quality parts of the stock market).  

For more speculative compartments of total portfolios, we welcome the emerging opportunities offered by the current distribution of risks. For example, preferred and hybrid securities are presenting a compelling entry point and yield potential, and small- and mid-cap stocks could bring outsized returns in exchange for higher volatility in the near term.

We’re here to help you navigate both the uncertainty and opportunities with your financial goals as our guide. Talk to your J.P. Morgan Advisor or reach out to us to learn how.

All market data from Bloomberg Finance L.P., 8/31/22.  

 

All market and economic data as of September 1, 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.

Preferred investments share characteristics of both stocks and bonds. Preferred securities are typically long dated securities with call protection that fall in between debt and equity in the capital structure. Preferred securities carry various risks and considerations which include: concentration risk; interest rate risk; lower credit ratings than individual bonds; a lower claim to assets than a firm's individual bonds; higher yields due to these risk characteristics; and “callable” implications meaning the issuing company may redeem the stock at a certain price after a certain date.

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.

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

 

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.

 

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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. ​


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