Economic & Market Update - J.P. Morgan Asset Management

Economic & Market Update

“There are 65 pages in the Guide to the Markets. However, we believe that the key themes for the first quarter can be highlighted by referencing just 13 slides.”
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Economic & Market Update: Using the Guide to the Markets to explain the investment environment

1. This slide tracks the progress and trajectory of COVID-19

The chart on the left shows cases and fatalities in the U.S. The virus has spread across the U.S., which accounts for roughly one-third of cases globally, and many lives have been lost.

The chart on the left shows cases and fatalities in the U.S. The chart on the right shows the growth in cases and fatalities using a 7-day moving average. The U.S. has reduced the spread of the virus, while bringing down fatalities, although with the virus on the rise again, it is clear the paths of these lines will not remain in one direction. Therefore, until there is a permanent medical solution, social distancing measures will continue to be in place to some extent.

COVID-19: U.S. confirmed cases and fatalities

U.S. economic recession

2. This recession may be the most severe since the Great Depression

The National Bureau of Economic Research declared the economic peak and end of the 11-year long record economic expansion as of February 2020. As investors try to size up the damage of this current recession, it is helpful to reflect on past recessions as a comparison.

The x-axis shows the years in which a given recession occurred, the y-axis shows the length of a given recession and the bubble size represents the severity of a given recession. The severity is defined as the peak to trough decline in real GDP.

The current recession appears to be the most severe since the Great Depression, per JPMAM estimates. However, it is also one of the shortest, estimated to be just the first half of this year. Although the period of negative economic growth may be short, it could take until we have a vaccine widely distributed for real GDP to surpass its 2019 peak.

3. Economic activity indicates different recovery paths across industries

Many traditional economic indicators have struggled to keep up with the economic realities on the ground. Higher frequency economic activity indicators provide a glimpse into different industries to understand the progress and success in reopening the economy.

So far, housing, measured by mortgage applications, or transportation that can be done in a social distant way, like driving, measured by driving direction usage, have recovered well. Hotel occupancy and global travel have begun to pick up slightly, but are still well below pre-COVID levels. Restaurants and travel, measured by U.S. seated dinners and TSA traffic, appear to have recovered very little.

High frequency economic activity

Unemployment and wages

4. The labor market should recovery very slowly

The unemployment rate declined to a 50-year low in February at 3.5%, and has since risen into the teens, the highest since the Great Depression. Although the unemployment rate rose very swiftly, we do not anticipate the recovery will be nearly as speedy. The unemployment rate could remain in the double digits at the end of 2020, and in the high single digits by the end of 2021.

Wages have risen since the start of the downturn, reflecting lower-wage earners losing their jobs, pushing up overall wages.

5. Earnings recovery should be gradual

Profits have declined significantly during this downturn, and are likely to face an earnings recession. Past earnings recessions have typically lasted 2-3 years, so analysts are anticipating a faster recovery than has occurred historically. Instead, it is likely that profits will not surpass their 2019 peak until 2022. However, profit declines are not experienced equally across all sectors—areas like technology and health care have held up much better than areas like energy and consumer discretionary.

Corporate profits


6. Inflation spike is a medium-term risk

Inflation has been subdued for years. However, we could see a change in that dynamic over the course of the recession and following expansion. Lower oil prices and diminished demand has been disinflationary thus far, but once the economy stabilizes, there is a risk of a spike in inflation due to massive fiscal and monetary support provided by the U.S. government and Federal Reserve. 

7. The Federal Reserve has expanded its toolkit

The Federal Reserve has cut rates to 0-0.25%, committed to unlimited asset purchases, and has implemented several lending facilities. These measures help financial market liquidity and provide access to credit. Although the Fed has provided unprecedented support already, there is still capacity within the existing toolkit, and more tools it is investigating if necessary. One thing the FOMC has said explicitly: they’re “not even thinking about thinking about raising rates.” 

The Fed and interest rates

Federal finances

8. The U.S. government has delivered massive fiscal stimulus

The heart of the economic damage is with consumers and businesses, so the U.S. government delivered a multi-trillion dollar fiscal package to mitigate permanent economic damage.

This legislation will provided very significant but temporary help to individuals, companies and state and local governments, but it won’t be able to prevent the economy from falling into a sharp recession, in terms of lost output and higher unemployment.  However, it should allow both households and companies to avoid the worst effects of recession until a vaccine has been developed and the economy can embark on a robust recovery.

Needless to say, however, this stimulus has come at a very high fiscal price, leaving the economy with a record high debt to GDP ratio by the end of fiscal 2021, even higher than in the aftermath of World War II.

9. Low for even longer

Nominal Treasury yields have fallen to historic lows and real yields are negative. In this low rate environment, investors will continue to hunt for yield. While the downturn has caused high yield spreads to widen, defaults are likely to rise, so careful security selection is critical. Additionally, high-quality fixed income will continue to play an important role in providing investors with protection if the recession should deepen and diversification.

Interest rates and inflation

S&P 500 valuation measures

10. U.S. equities have recovered significantly

U.S. equities have recovered significantly from the March lows, and at record speed. However, as markets look through the virus and the downturn to the recovery, valuations are well above historical averages. However, investors should recognize that any valuation based on earnings over the upcoming year will look high given the unusually deep recession. Valuations look much closer to normal levels based on lagged earnings. While markets may experience volatility ahead with risks such as a resurgence of the virus or election uncertainty, ultra-low rates and support from the Federal Reserve provide meaningful support to equities.

11. Internationally, economic recoveries depend on successful strategies to manage the virus

Some economies have managed the virus successfully, like many countries in the Asia Pacific region. This should help those economies face less dramatic downturns and a faster recoveries. However, other areas of the world, in particular select emerging markets, have had challenges containing the spread of the virus, which could result in prolonged economic weakness.

COVID-19: global confirmed cases and fatalities

U.S. and international equities at inflection points

12. International stocks offer long-term opportunities

Both U.S. and international stocks sold off at the height of the COVID crisis, but the valuation gap between U.S. and international stocks that persisted throughout the recent expansion still persists today. However, this dynamic could shift in the next expansion. 

The long-term growth prospects of EM economies still look better than for the U.S., valuations remain cheaper overseas, and the dollar has been retreating, which amplifies the return on international equities.  Europe, which has been long unloved, may have a catalyst for turnaround with more promising efforts towards fiscal integration.

13. Risks ahead call for diversification

Despite a rebound in markets, the economic, labor market and earnings recoveries will likely be much slower. With additional risks ahead such as a resurgence of the virus and the election in November, investors would likely benefit from a focus on quality in equity and fixed income, with a balanced approach to confront a range of outcomes.

Asset class returns