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Economic Update: March 16, 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 second estimate of 4Q19 real GDP growth came in unrevised at 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. While no major data was released last week, the leisure, tourism and hospitality industries have undoubtedly begun to feel the pressure of COVID-19 given widespread cancellations and social distancing. We anticipate a recession ahead, forecasting negative GDP growth in 2Q and 3Q.

Jobs

Nonfarm payrolls increased by 273,000 in February, above expectations of 175,000, with upward revisions of 85,000 jobs in the prior two months. The unemployment rate fell slightly to 3.52%. The labor force participation rate remained at 63.4%, as 60,000 people dropped out of the labor force. Wage growth rose 0.3% m/m for all workers and for production and non-supervisory workers, up 3.0% y/y and 3.3% y/y, respectively. However, because the reference period for the employment report is the week that includes the 12th day of the month, this report does not reflect the deterioration in markets and the economy from COVID-19. In addition, the unseasonably warm weather boosted both the average work week and total payroll gains.

Profits

With 481 companies having reported (98.1% of market cap), our current estimate for 4Q19 earnings is $39.22, with EPS growth of 12.0% 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 49% 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 February, increasing 2.3% y/y. This was driven by a 0.5% m/m increase in food at home, which offset energy declines, possibly reflecting food stockpiling at the end of the month due to COVID-19. Core CPI (ex-food and energy) rose 0.2% m/m, increasing 2.4% y/y. January headline PCE and core PCE both rose 0.1% m/m and 1.7% and 1.6% y/y, respectively. While inflation has picked up this year, the significant recent decline in energy prices should cause headline inflation to fall in the months ahead.

Rates

The FOMC delivered an emergency rate cut of 50 bps, bringing the federal funds target rate to a range of 1.00%–1.25%. This was the first rate cut outside of an official FOMC meeting since 2008. In an emergency press conference, Chairman Powell said that the Fed took this action as it saw that COVID-19 was having a material impact on the economic outlook. The FOMC convenes on March 17 and 18, and is likely to cut rates again, potentially to 0-0.25%. Last week, the Fed injected $1.5 trillion into repo markets, and distributed its $60 billion of T-bill purchases across maturities to support liquidity in financial markets.

Risks

  • Impacts from COVID-19 may cause a global recession.
  • Political headlines may foment market volatility.
  • Earnings growth has slowed and could stall if there is an economic recession.

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 (March 16, 2020)

Data are as of March 16, 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.

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.

© JPMorgan Chase & Co., March 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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This material is from J.P. Morgan and is being posted with permission from J.P. Morgan. The views expressed in this material are solely those of the author and/or J.P. Morgan and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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