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Economic Update: Dec. 2, 2019

By:

Chief Global Strategist for J.P. Morgan Funds

This weekly update provides a snapshot of changes in the economy and markets and their implications for investors.

Growth

3Q19 real GDP growth was revised up to 2.1% q/q saar, driven by upward revisions to inventories, housing and consumption, although partially offset by downward revisions to government spending. Looking ahead, consumer spending appears to remain on track, rising 0.3% m/m in October. On the other hand, although durable goods orders rebounded from a weak September, the strength was driven by defense spending.

Jobs

Nonfarm payrolls increased by 128,000 in October, topping consensus expectations of 75,000, despite impacts from the auto workers strike. Without the effects of the strike, payroll gains would have been modestly higher this month, and the prior two months had very healthy total upward revisions of 95,000 jobs. Still, job growth has averaged 167,000 per month thus far in 2019, compared with an average monthly gain of 223,000 in 2018. The unemployment rate ticked up to 3.6%, up from last month’s 50-year low of 3.5%. Wages continued to grow steadily, rising 0.2% m/m for both all workers and production and non-supervisory workers (3.0% y/y and 3.5%, respectively). Still, the overall trend of slowing gains and constraints on the labor supply remain.

Profits

With 479 companies having reported (97.2% of market cap), our estimate for 3Q19 is $40.21, and EPS growth is at -2.8% y/y. This season, 74% of companies beat on earnings, while 46% beat on revenue. Headwinds to earnings included slower global growth, lower oil prices and a stronger dollar, plus comparisons to a robust 3Q18 posed a challenge to earnings growth. Margins remained under pressure from rising wages, higher input costs and some tariff impacts. However, buybacks added 1.6 percentage points to the overall level of earnings growth, providing a partial offset to the decline in margins. From a sector standpoint, financials and health care delivered the strongest results, while energy, info tech and communication services struggled the most.

Inflation

Remnants of firming inflation from over the summer reappeared in the October CPI report, with headline CPI rising 0.4% m/m and 1.8% y/y, driven by a strong increase in energy. However, core CPI was more subdued, rising 0.2% m/m, increasing 2.3% y/y, just off its year-over-year cycle-high reading. Similarly, the PCE deflator was softer than expected, increasing 0.2% m/m and 1.3% y/y on a headline basis, and 0.1% m/m and 1.6% y/y excluding food and energy. While headline inflation inches up as oil prices trade higher, core inflation remains range bound.

Rates

The FOMC cut the federal funds target rate by 25 basis points for the third consecutive time to a range of 1.50%–1.75%, again citing global developments and muted inflation pressures. Chair Powell characterized the current stance of monetary policy as appropriate, hinting at a likely end to the “mid-cycle adjustment.” We anticipate no more cuts this year. The Fed has also begun asset purchases of short-term Treasuries to shore up the funding markets, intending to continue this technical balance sheet expansion through 2Q20.

Risks

  • Unresolved trade tensions may exacerbate a slowdown in global growth.
  • An escalation in tensions between the U.S. and Iran could cause an oil shock.
  • Corporate debt is rising, and declining in quality.

Investment Themes

  • Risk assets have reasonable valuations and may have room to run heading toward the end of this cycle.
  • Credit and short duration tend to perform well late cycle, while core fixed income protects heading into a downturn.
  • Long-term growth prospects and cheap absolute and relative valuations support international equities.

Weekly Economic Update (December 2, 2019)

Past performance does not guarantee future results.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index. Indexes are unmanaged.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

The views expressed are those of J.P. Morgan Asset Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm.

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J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. and JPMorgan Asset Management (Canada) Inc.

© JPMorgan Chase & Co., December 2019

Important information

Please be aware that this material is for information purposes only. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. JPMorgan Asset Management Marketing Limited accepts no legal responsibility or liability for any matter or opinion expressed in this material.

The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.

Disclosure: J.P. Morgan

Past performance does not guarantee future results.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

The price of equity securities may rise or fall because of changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. International investing involves a greater degree of risk and increased volatility. There is no guarantee that companies that can issue dividends will declare, continue to pay, or increase dividends. Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage.

JPMorgan Distribution Services, Inc., member of FINRA.

J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. and JPMorgan Asset Management (Canada) Inc.

 

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