Welcome to our Quarterly Models and Markets update. We’ll walk through key themes across our model portfolios, paired with relevant Guide to the Markets slides, which you can use in conversations with clients. My name is Amy Moroz, and I am an Investment Specialist covering our J.P. Morgan Model Portfolios. 

To start, our first theme is that we continue to be constructive on the forward looking outlook for the economy: 

- Throughout the quarter we saw continued progress on the global reopening & recovery – but it wasn’t without some bumps along the way – Delta variant, inflation, supply chain issues, the list goes on.

- If we take a step back and look at the bigger picture using slide 51 of the Guide, or the so called “PMI heat map”:

o The global economy is still in expansionary territory (to keep it simple, think green is good & red is bad, with numbers above 50 indicating expansion).

o Looking forward over the next quarter, we anticipate that the global economy should continue to strengthen given strong fundamentals and declining COVID cases. 

o Perhaps at a slower pace moving forward, but still above trend, and lasting for longer.

- Big driver of this can be attributed to the strength that we are seeing in the consumer:

o On the right of slide 18 of the Guide, you can see that the consumer makes up almost 70% of GDP.

o We anticipate consumer momentum to continue to improve given record levels of savings, healthy balance sheets, pent-up demand – which should help power the US economy forward.

- What does this mean across our portfolios? We are still leaning into risk and prefer stocks over bonds.

Equities:

- Next theme: Within equities, we continue to have a bias towards cyclical equities, though we have been lessening exposures and balancing with a focus on quality.

o To start with Cyclicals, these are the areas of the market tied to the economic cycle. As we see growth continue to pick up globally, we expect these areas to benefit. Not just within the US backyard, but also overseas.

- On the left of slide 47 - you can see that other areas such as Europe or Japan have healthy exposure to Cyclicals, offering more sensitivity to the powerful post-pandemic economic rebound:

o Europe is a good example where we have dedicated exposure – and while slow with the initial vaccine rollout, they have been making substantial improvement in vaccinations allowing them to prove resilient in the face of the delta variant.

o Additionally, on the right of this slide, Europe & other developed country stocks look cheap from a valuation standpoint vs. the U.S. (cheapest levels in 20 years!) – leading us to maintain diversified exposure across International Developed Market Equities.

- Finally on equities, using slide 8 – strong earnings growth has helped propel the S&P 500 higher this year. We anticipate solid earnings growth to remain the key driver of positive equity returns over the coming quarter. U.S. Large Caps are an area that we like as they tend to offer fairly consistent earnings growth thanks to the HQ companies in areas like Technology or Health Care. 

Fixed Income:

- Interest rates still remain at historic lows, as shown on Slide 31 of the Guide, but with the backdrop of continued growth & rising inflation  - we still see room for rates to continue moving higher from here:

o Rising rates could result in weaker, or even negative, returns for traditional “safe haven” bonds like U.S. Treasuries.

- Across our portfolios we are leaning into “extended credit” – areas of the fixed income market with higher levels of income (think High Yield over traditional core bonds). 

- Also, tilted towards shorter duration across our models:

o Why? Generally when rates rise, bond prices go down – and you can see that impact on slide 34 of the Guide 

o So we feel that Fixed Income that is shorter-term in nature should hold up better in a rising rate environment 

To close, our last theme is around managing volatility:

- While worries around COVID, inflation, and slowdown in growth may persist throughout the remainder of the year – we don’t think it’s powerful enough to derail the momentum of the recovery given the progress on vaccines, strong consumer, robust demand, and easy financial conditions.

- However, we are mindful of the building wall of worry, and conscious of the fact that valuations remain high across both Equities and Fixed Income (translation: stocks + bonds are expensive):

o Slide 16 of the Guide is a good reminder that market drawdowns are normal, and it’s possible we may hit an air pocket at some point 

o As such, we have reduced some of our larger active tilts across our portfolios 

- Finally, slide 61 of the Guide, reinforces the fact that it’s important to remain well diversified across portfolios to help smoothen out the ride.

- Wrapping things up, we are positive on the outlook for the economy. Leaning into cyclical equities with a focus on quality, still with a preference for extended credit & shorter-duration within FI. Looking ahead, we are conscious of the risks in the market – and have moderated some of our larger active tilts while staying well diversified across our portfolios.

That wraps up our model themes for the quarter. To access additional tools and resources designed to help you grow your practice with models, visit our Models Resource Center on JPMorgan.com/modelportfolios. Be sure to tune in next quarter for our Models and Markets update. Til next time!