Growth

3Q20 real GDP rose 33.1% q/q at a seasonally adjusted annual rate. Increases in consumption, private inventories, business fixed investment, housing and exports were partially offset by decreases in government spending and increases in imports. While it was the best quarterly GDP print on record, it followed the worst quarterly GDP print on record of -31.4% in 2Q. Despite a solid bounce back, economic output is still about 3.5% below its 4Q19 level. Looking ahead, the economic recovery should slow considerably, averaging 2%-3% growth per quarter annualized in 4Q20 and into 2021, and the stability of the recovery relies on additional fiscal stimulus from the government. Last week, industrial production rose 1.1% m/m, but is still 5.6% below February pre-pandemic levels, while retail sales rose a modest 0.3%, up 4.9% from February pre-pandemic levels.

Jobs

Nonfarm payrolls increased by 638,000 in October and the unemployment rate fell to 6.9%. This masks the strength of the 906,000 private payroll jobs added, which were then partially offset by 268,000 fewer government jobs, of which 147,000 were temporary Census 2020 workers. Wages grew 0.1% m/m for all workers and 0.2% for production and non-supervisory workers, both up 4.5% y/y. The economy has now regained 54% of the 22 million jobs lost between February and April. Although this jobs report demonstrated solid progress in a gradual recovery, the pace of progress has slowed considerably.

Profits

The 3Q20 earnings season wound down with 464 companies having reported (91.8% of market cap). Our current estimate for 3Q20 earnings is $37.42 with EPS declining 6.0% y/y. Thus far, 83% of companies have beaten on EPS estimates, and 73% have beaten on revenue estimates, both well above long-term averages, reflecting overly bearish initial estimates thus far. Sectors under pressure in the third quarter were energy and industrials, while consumer staples, technology, and health care had positive earnings growth.

Inflation

Headline and core CPI were flat in October, rising 1.2% and 1.6% y/y, respectively. September headline and core PCE both rose 0.2% m/m, rising 1.4% and 1.5% y/y, respectively. While low energy prices and slack in the economy continue to put downward pressure on inflation, price pressures appear stronger than what would have been expected in the wake of a downturn as severe as the 2020 recession.

Rates

The FOMC maintained the federal funds target rate at a range of 0.00%–0.25%. The Committee will also maintain its current pace of asset purchases of $120 billion per month. Given the election on Tuesday, Chairman Powell remained as uncontroversial as possible in his press conference, although he did underscore that both monetary and fiscal policy have played critical roles in combating the effects of the pandemic, and will continue to do so under the next administration. If the outcome of the election results in some form of divided government, more modest fiscal policy may be supplemented by more generous monetary policy from the Fed, which has already committed to letting inflation run hotter than its 2% target for some period of time and keeping rates low through 2023.

Risks

• The U.S. recession and recovery could be at a slower pace than markets are anticipating.
• Political headlines could foment market volatility.
• Inflation could spike in the medium term.

Investment Themes

• Quality with a dash of cyclicality should be a focus for U.S. equity investors.
• Fixed income investors should move up in quality, and look to core bonds for portfolio ballast.
• Long-term growth prospects and cheap absolute and relative valuations support international equities.

Data are as of November 23, 2020

Past performance does not guarantee future results.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading

industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy

for the total market. An investor cannot invest directly in an index. Indexes are unmanaged.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions.

We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale

of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended

to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve.

Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

The views expressed are those of J.P. Morgan Asset Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm.

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