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Economic Update: Feb. 24, 2020

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

The first estimate of 4Q19 real GDP growth was 2.1% q/q saar, with positive contributions from consumption, government spending, home building and exports, which were partly offset by negative contributions from inventories and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased, resulting in a positive contribution for GDP growth. Global preliminary manufacturing PMIs came in slightly weaker, with Japan’s PMI dragged down by consumption declines and coronavirus impacts. The stronger German reading masked underlying demand weakness, while France fell back into contractionary territory. Similarly, the U.S. declined to 50.8, driven by slower expansions in production and new orders. The U.S. economy still appears to be slowing, with 1Q20 GDP potentially coming in between 1.0-1.5%.

Jobs

Nonfarm payrolls increased by 225,000 in January, above expectations of 160,000, with modest upward revisions to the prior two months. However, benchmark revisions revealed slowing job growth, as average monthly gains were revised down to 193,000 in 2018, and to 175,000 in 2019. Adjustments to population estimates effectively reduced the size of the labor force and employment, indicating weaker demographics. The unemployment rate ticked up to 3.6%. Wage growth rose more modestly than expected, increasing 0.1% m/m and 3.3% y/y for production and non-supervisory workers. Despite strong payroll gains and more workers joining the labor force, modest wage growth and weaker demographics may limit growth ahead.

Profits

With 437 companies having reported (90.6% of market cap), our current estimate for 4Q19 earnings is $37.88, with EPS growth of 8.1% y/y. EPS growth is expected to be strong given easy comparables to 4Q18, which experienced weakness due to accounting adjustments. Thus far, 71% of companies have beaten on earnings, and 50% have beaten on revenue. While margins, revenues and share buybacks are expected to contribute positively, margin pressures remain and share buyback contributions may be the lowest since 2Q18. From a sector standpoint, financials have been the strongest performer, energy has been the weakest and tech earnings have been stronger than expected.

Inflation

Headline CPI, which includes food and energy, rose 0.1% m/m in January, increasing 2.5% y/y, drive by a 6.3% y/y increase in energy. However, with the recent retreat in oil prices, energy was down -0.7% m/m. Core CPI (ex-food and energy) rose 0.2% m/m, increasing 2.3% y/y. December headline PCE rose 0.3% m/m and 1.6% y/y, and the core PCE deflator increased slightly by 0.2% m/m and 1.6% y/y. While inflation has picked up this year, the decline in energy prices in the last few weeks could mean that inflation will come down slightly over the next few months.

Rates

The FOMC maintained the federal funds target rate range at 1.50%–1.75%, again concluding that “the current stance of monetary policy is appropriate to support sustained expansion of economic activity,” suggesting it intends to remain on pause over the medium term. It made tweaks to its balance sheet policy, planning to continue to purchase T-bills into 2Q20. Once reserves have reached “ample levels” the balance sheet will continue to grow gradually to support the demand for currency, and repurchase operations will diminish. Looking forward, the bar remains high for the Fed to adjust interest rates in either direction through 2020.

Risks

  • Unresolved trade tensions may exacerbate the slowdown in global growth.
  • Political headlines may foment market volatility.
  • Earnings growth has slowed and will likely continue to slow, facing margin pressures.

Investment Themes

  • Quality and total shareholder yield (dividends + buybacks) should be a focus for U.S. equity investors.
  • Fixed income investors should move up in quality, and look to core bonds for portfolio ballast.
  • Long-term growth prospects and cheap absolute and relative valuations support international equities.

Weekly Economic Update (February 24, 2020)

Data are as of February 24, 2020

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., February 2020

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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