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Quarterly Perspectives

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LATEST QUARTERLY PERSPECTIVES

Economic growth and the composition of GDP

Theme overview

U.S. Economy and markets: “Make hay while the sun shines”

“Three” followed by a string of “twos”

  • The U.S. economy grew at an impressive 4.2% q/q annualized pace in the second quarter. Recent data suggest this momentum will continue through the end of the year.
  • While economic growth continues to look robust, late-cycle signals are becoming more prevalent: a lack of pent-up demand due to low unemployment, rising wages, higher interest rates and firming inflation.
  • There historically has been impressive upside in investing in a late-cycle economy. Investors should “make hay while the sun shines” and maintain some risk exposure, while gradually positioning more defensively as the bull market and economic expansion age.
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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: Robust earnings and the late cycle playbook

Profit growth remains strong, but should slow in 2019

  • Strong economic and profit growth on the heels of tax reform have led U.S. equity markets to outperform their international counterparts so far in 2018. However, earnings growth in the U.S. should begin to normalize next year.
  • With the macroeconomic backdrop pointing to higher inflation, rising rates and a tailwind to economic growth from fiscal stimulus, we prefer a tilt toward cyclical and value-oriented areas of the U.S. equity market.
  • The current bull market is now the longest in history and much of the “easy money” has been made. As a result, being selective across sectors and styles will become increasingly important.
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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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