Quarterly Perspectives - J.P. Morgan Asset Management

Quarterly Perspectives



The length and strength of expansions

Theme overview

Steady growth and rising markets: It’s a two-way street

Slow and steady (growth) wins the race

  • The expansion in the U.S. has been slow and steady, as the economy grows at 2%. While we do not expect an imminent recession, the expansion is in its later stages.
  • This healthy economic picture, along with the earnings recovery taking place, supports the market’s ability to move higher. It is very rare to see a bull market end without a recession first.
  • While both the economy and the market ebbs and flows, we know staying invested is key. Through a long-term outlook and the ability to weather short-term volatility, investors get to benefit from the power of compounding. Being in the later stages does suggest that looking for strategies to limit losses is key.

Theme overview

Healthy normalization: Putting rising rates into historical perspective

The tightening cycle in the U.S. continues

  • The Federal Reserve (Fed) will likely continue to tighten monetary policy throughout 2017 and into 2018.
  • While this pace is still relatively slow in an historical context, it signals that the economy is strong and can handle a more normal level of interest rates.
  • As U.S. monetary policy gradually tightens, this should push bond yields higher. This rising rate environment is even more challenging, however, due to the high level of duration in U.S. bond markets.

The Federal Reserve balance sheet

Corporate profits

Theme overview

No need to hide if there’s volatility outside

Earnings continue to look solid

  • The S&P 500 is up over 10% this year, but the largest pullback we have seen has been a mere 3%.
  • Investors have become increasingly anxious, wondering when the next pullback will occur and fearing it could evolve into a full-on bear market.
  • While a 10% pullback would not be surprising, healthy earnings growth and only slightly stretched valuations should prevent any sell-off from becoming more severe.

Theme overview

International equities: Speeding up

Passing the baton from the U.S. to International

  • International equities have underperformed U.S. equities by over 150 percentage points since March 2009, a result of economic and earnings challenges overseas.
  • However, the future is already looking brighter for international investing. Four factors suggest that international equities’ outperformance so far this year is set to continue: more attractive valuations, acceleration in growth outside of the U.S., faster earnings growth abroad and possible currency tailwinds.
  • Investors should make sure they have enough exposure to this improving growth story overseas, especially as the U.S. is in the later innings of its own expansion.

U.S. and international equities at inflection points

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