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Quarterly Perspectives

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LATEST QUARTERLY PERSPECTIVES

Economic growth and the composition of GDP

Theme overview

Economic growth: A “three” followed by a string of “twos”

2018: THE HERE AND NOW LOOK GOOD

  • Despite some weaker-than-expected economic growth in the first quarter, data in April and May point to a second-quarter GDP growth rate of 4% annualized, which could help boost growth to 3% year-over-year.
  • With a pickup in consumption due to lower taxes and increased government spending from fiscal stimulus, the boost to economic growth should continue into 2019.
  • However, fading fiscal stimulus in the second half of 2019, coupled with labor supply constraints and monetary tightening, should cause growth to moderate back to trend of 2%.
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Theme overview

Fixed income: Flexibility in a rising rate environment

The Fed will continue to normalize monetary policy

  • The Federal Reserve (Fed) will continue to tighten monetary policy in the second half of 2018 and 2019.
  • Policy normalization will be achieved through two mechanisms: balance sheet reduction and interest rate hikes. Together, these two trends will create a challenging environment for fixed income investors.
  • As bond yields push higher flexibility in fixed income investing will be critical to success.
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The Fed and interest rates


Returns and valuations by style

Theme overview

U.S. equities: Late cycle opportunities and risks

WILL THERE BE A CHANGE IN MARKET LEADERSHIP?

  • The S&P 500 is in the ninth year of a bull market and much of the “easy money” has already been made. As a result, selectivity investing across sectors, styles and sizes will become increasingly important.
  • With the macroeconomic background pointing to higher inflation, rising rates and a tailwind to economic growth from fiscal stimulus, we prefer a tilt toward smaller and value-oriented areas of the U.S. equity market.
  • The Federal Reserve continues to raise rates, which could lead to higher equity volatility in the short term. The point at which rising rates become a headwind for equities is likely lower than it has been historically, but we are not there yet.
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Theme overview

Emerging market equities: The story is not over

THE HARE VS. THE TORTOISE

  • Even after two years of emerging market (EM) equity outperformance compared to developed markets (DM), the memory of the tough years of 2011 to 2015 is still fresh in investors’ minds. This year’s 3% drop in EM equities has brought back the question: is the EM story over?
  • Investors should remember three key points: 1) Despite the recent hiccup, EM fundamentals are still solid, 2) The longer-term story of the emergence of the EM consumer is still very much alive, and 3) Many EM countries are now better able to weather moments of stress.
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Emerging markets

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