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Economic Update: May 11, 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

1Q20 real GDP fell 4.8% q/q at a seasonally adjusted annual rate, essentially marking the start of a sharp recession as a result of a halt in economic activity in order to contain the spread of COVID-19. The fall in economic growth reflected negative contributions from consumption, business fixed investment, exports and inventories, but positive contributions from housing and government spending. This decline in real GDP growth is consistent with our forecast of a U-shaped recession, or a fall, a stall and a surge. April services PMIs confirmed the continuing fall, with the Markit non-manufacturing PMI dropping to 26.7, and the ISM non-manufacturing PMI declining to 41.8, contractionary for the first time since December 2009.

Jobs

Nonfarm payrolls fell by 20.5 million in April, pushing the unemployment rate up to 14.7%, the highest since the data began being recorded in 1948. Leisure and hospitality employment fell the sharpest, by 47% or 7.7 million. Wages rose 4.7% m/m for all workers and 4.3% m/m for production and non-supervisory workers, up 7.9% y/y and 7.7% y/y, respectively, due to job losses among lower wage earners. Although unemployment may rise in the months ahead, it should drift down slowly but still be in the double-digits entering 2021 until a vaccine is distributed.

Profits

With 423 companies having reported (89.5% of market cap), our current estimate for 1Q20 earnings is $20.62, with EPS growth declining 45.7% y/y. Revenues and margins have dragged on profit growth but buybacks have provided a minimal positive contribution. The halt in economic activity in March is the primary cause of the earnings slide, although oil prices, which were down 16% on average during the quarter, also contributed to earnings weakness. Financials, energy, industrials and consumer discretionary have had the sharpest declines in earnings, while health care, info. tech, consumer staples and real estate have produced positive growth thus far.

Inflation

March headline PCE fell 0.3% m/m and core PCE fell 0.1% m/m, rising 1.3% and 1.7% y/y, respectively. Headline CPI, which includes food and energy, fell 0.4% m/m in March, increasing 1.5% y/y. Core CPI (ex-food and energy) fell 0.1% m/m, increasing 2.1% y/y. The significant decline in energy prices and growth puts downward pressure on inflation in the short-term, although monetary and fiscal support should push it up in the medium-term.

Rates

The FOMC maintained the federal funds target rate at a range of 0.00%–0.25%. The Committee said it “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Chair Powell also discussed the previously announced unlimited asset purchases, which have now increased the Fed’s balance sheet by $2.3 trillion. The Fed seeks to restore market functionality, ease financial conditions in the broad economy and support the flow of credit through these asset purchases and the range of credit facilities established.

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 (May 11, 2020)

Data are as of May 11, 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., May 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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