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Economic Update: October 28, 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

The third estimate for 2Q19 real GDP growth came in at 2.0%, driven by consumption and government spending that were partially offset by inventories, net exports and housing. Looking ahead to the third quarter, inventory growth should decline further while consumer spending and government spending will likely grow at a more moderate pace, and trade numbers should continue to be weak. Although the preliminary manufacturing PMI for the U.S. reached a 6-month high at 51.5 last week, manufacturing health was not corroborated by durable goods orders, which fell 1.1% m/m, indicating continued weakness in the manufacturing sector.

Jobs

The unemployment rate fell to a fresh 50-year low of 3.5% in September, while the labor force participate rate remained steady at 63.2%. Nonfarm payrolls increased by 136,000 in September, below expectations of 150,000. This appears to be roughly in line with August, except September only added 1,000 temporary 2020 Census workers, while last month 25,000 Census workers were added, resulting in more permanent job gains in September. Wages disappointed, flat on the month and rising just 2.9% y/y for all workers. With fewer unemployed people, fewer discouraged workers and fewer people joining the labor force, the labor supply is constrained, which should be a headwind for long term growth.

Profits

With 189 companies having reported (44.4% of market cap), our current estimate for 3Q19 is $40.00, and EPS growth is at -3.3% y/y. Thus far, 79% of companies have beaten on earnings, while 48% have beaten on revenue. Although consensus analyst estimates call for negative earnings growth, given the average earnings surprise since 2012, earnings growth could be modestly positive. Headwinds to earnings include slower global growth, lower oil prices and a stronger dollar, plus comparisons to a robust 3Q18 pose a challenge to earnings growth. Margins will remain under pressure from rising wages, higher input costs and some tariff impacts. However, buybacks look set to add about 1.6 percentage points to the overall level of earnings growth, providing a partial offset to the decline in margins. From a sector standpoint, health care is set to deliver the strongest results, while energy may deliver the weakest due to lower oil prices.

Inflation

Headline CPI inflation was flat m/m in September, and rose 1.7% y/y, held down by a 4.7% y/y decrease in energy. Core CPI increased 0.1% m/m and 2.4% y/y. The August PCE deflator remained relatively stable, with headline PCE flat m/m, and up 1.4% y/y. Core PCE was up 0.1% m/m, and increased 1.8% y/y with a revision upwards for the prior month to 1.7% y/y. Firming inflation pressures erode the rationale for further rate cuts by the Federal Reserve.

Rates

The Federal Reserve cut its target range for the federal funds rate by 25bps to 1.75%-2.00% at its September meeting. The rationale for the cut was global developments and muted U.S. inflation. However, there were conflicting messages from a dovish statement and a more hawkish press conference as to whether these cuts would continue. Chair Powell seemed to reaffirm this cut was still part of a “mid-cycle adjustment” rather than the beginning of a longer rate cutting cycle, but left it up to the economic environment going forward to determine the future path of rates. We anticipate one more cut this year.

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 (October 28, 2019)

Data are as of October 28, 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., October 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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