Quarterly Perspectives - J.P. Morgan Asset Management

Quarterly Perspectives



Economic growth and the composition of GDP

Theme overview

Wind at your back: later cycle acceleration with a fiscal gust

Not too late to participate: Investing amid later cycle tailwinds

  • The 2nd and 3rd quarters of 2017 showed U.S. GDP growth above 3% q/q annualized. That momentum looks like it will carry through the end of the year and into 2018.
  • With the passage of tax reform, we anticipate fiscal stimulus to boost growth through 2018 on the back of lower corporate and individual tax rates.
  • Even though the economic expansion and bull market are likely in later stages, getting invested remains important as there are still investment opportunities and cash yields remain historically low.

Theme overview

Fixed income: Flexibility in a rising rate environment

The Fed will continue to normalize monetary policy

  • The Federal Reserve (Fed) should continue to tighten monetary policy for the rest of 2018 and beyond.
  • Policy normalization will be achieved through two mechanisms: balance sheet reduction and interest rate hikes. Together, these mechanisms make for an unprecedented environment for fixed income investors.
  • As U.S. monetary policy continues to tighten, bond prices should fall further, pushing yields higher and making fixed income investing even more challenging. Moving forward, flexibility in fixed income portfolios will be critical to success.

The Fed and interest rates

Corporate profits

Theme overview

U.S. equities: Rising rates and the earnings safety net

2018 earnings look solid

  • Strong profit growth propelled equity markets in 2017, as headwinds from the U.S. dollar dissipated and margins remained at all-time highs.
  • Rising rates could lead to higher equity volatility in the short term, as the point at which rising rates become a headwind for equities is likely lower than it has been historically.
  • A sharp rise in rates led to a spike in volatility earlier this year, but fundamentals remain intact. Strong 2018 profit growth, partially thanks to tax reform, should act as a safety net if markets begin to wobble.

Theme overview

International equities: Not a one-hit wonder

The beat goes on

  • 2018 looks set to be the second year of good global economic growth, with every major region participating in this story. Encouragingly, the momentum remains strong in regions that lagged behind for many years, namely the eurozone, Japan and emerging markets.
  • International equities outperformed those in the U.S. in 2017, and continued solid economic growth, accelerating earnings growth, reasonable valuations and a weaker U.S. dollar suggest that this story is set to continue over the next few years as well.
  • Investors should ensure they do not underestimate the strength of the global economy or overestimate their exposure to this improving story.

Manufacturing momentum

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