Dovish reaction. Markets rallied this week. Bond yields fell across the curve, with the 2-year Treasury yield dropping to its lowest levels since October. 10-year Treasury yields dropped below the technically important 3.5% level, and 30-year mortgage rates are approaching 6%. Markets are still implying an ~80% probability of another 25-basis-point hike at the next Fed meeting in March, but it seems like risks are finally skewed toward the Fed doing less than that. Core bonds, our top idea heading into the year, have returned close to 4% already.

Equities cheered this week. The Nasdaq 100 ripped by over +4% while the S&P 500 gained over +2%. Some interesting cyclical names made new 52-week highs, including Pulte, DR Horton, Lennar, Wynn, Starbucks, Tapestry and ON Semiconductor. European equities surged to post-invasion highs, and are now flat over the last year.

The VIX implied equity volatility index closed at one of its lowest levels of the last year, and the MOVE implied bond volatility index made its lowest close since last March. Lower volatility is welcome news for investors. We did think that markets would be stronger in 2023, and a 10% year-to-date rally in global equities is a great start. 

Mixed bag for data. Besides the Fed, there were plenty of data points for investors to parse through. This morning, the latest employment report crushed economist expectations, and showed that the U.S. economy gained over 500,000 jobs in the month of January, while the unemployment rate fell to 3.4%. While there could be some seasonal quirks that overstate the strength, this reduces near-term recession risk, but also confirms that the Fed will probably still raise rates one or two more times during this cycle.

The S&P Manufacturing Purchasing Managers’ Index (PMI) for the U.S. stabilized at 46.9 (vs. 46.2 last month), while the ISM Manufacturing survey deteriorated further to 47.4. Markets were much more focused on the Fed’s decision and tone, and would probably justify the economic weakness as proof that higher rates are having their intended impact. 

The most perplexing piece of data was probably the JOLTS Job Openings, which signaled a surge in labor demand from companies despite the plethora of headlines about layoffs from the tech sector.

Over in Europe, headline inflation came in softer than expected (8.5% YoY vs. 8.9% expected) thanks to the big drop in energy prices. While the core measure was still firm (5.2% YoY), falling energy prices will help alleviate the cost of living crisis and helps improve the outlook for the region.

Across the pond. The biggest change to our view since we released our outlook in December is our assessment of the situation outside of the U.S. In fact, we are more positive on European equities than we have been in quite some time. Simply, the list of negatives is shrinking, not growing, and the market still trades at a discount to the U.S. that is too wide. Because of the warm winter and falling natural gas prices, European economic data is surprising to the upside at the fastest rate since “reopening” in 2021.

Because the European recession was delayed/cancelled, investors are now coming to terms with an ECB that can actually keep interest rates well above zero for a sustained period of time. The biggest beneficiaries of that environment seem to be European banks, who have been starved of net interest income for most of the last 10 years. The group has been on a tear recently, rallying 17% in local terms so far this year, and 55% from last summer’s lows. The stability of the European financial sector is another reason why we are more constructive on the region.

Learnings from earnings. While the outright read of this quarter’s earnings season is pretty weak (earnings have surprised to the downside in aggregate relative to a +4.1% average beat over the last four quarters), the market has largely shrugged it off. Just last night behemoths Apple, Amazon and Alphabet reported lackluster results, but it has merely dented the year-to-date rally. 

On the other hand, perhaps the star of earnings seasons so far has been Meta (née Facebook), which surged by ~25% after reporting stronger than expected results and outlining a plan to return capital to shareholders through buybacks.

What it means for you. In our Outlook, we wrote that markets were presenting investors with one of the best entry points for a balanced portfolio of stocks and bonds in a decade. Even though markets have started the year off stronger than most could have imagined, those that are building a long-term portfolio should still feel confident putting their capital to work.

The major headwinds of 2022 (inflation, hawkish central banks and a collapse in housing activity) are receding while the prospects for Europe and China are improving. The U.S. economy is not out of the woods, but the rally that we have seen to start the year signals that expectations are still low. Most importantly, investors have compelling options across asset classes, geographies and investment styles, at least for now. 

Please reach out to your J.P. Morgan team for more on the opportunities that we see, and how they might fit into your financial plan.

DISCLOSURES

All market and economic data as of February 3, 2023 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.

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.

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.
• 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. ​