Insights from Our CIO: Running to Stand Still
It’s important not to overreact to sensational headlines, as emotional responses can create investment opportunities. However, the current market environment suggests a cautious approach.
The fast pace of change can be distracting, making it important to remain focused and measured. Markets may attempt to rise as investors hope that deregulation and tax cuts will outweigh any potential negative impacts from trade and immigration policies. However, the outcome is uncertain, and this uncertainty calls for a cautious approach to risk-taking.
J.F. Kennedy’s observation: “… the one unchangeable certainty is that nothing is certain or unchangeable.” We’re seeing it play out in real time. We have a tornado of headlines swirling about. Steady hands prevail. For long-term money, stay invested.
View on equities
We’re modestly overweight in equities, funded from core bonds. We have a small underweight to European stocks which is currently dragging on performance. The European market bounce seems reasonable as a catch-up trade. Valuation dispersion was extreme.
Markets have done a good job this year reeling in exuberance. Also, fear. It’s a healthy sign of price discovery. Let’s hope we stay within emotional guardrails. U.S. equity market volatility, as measured by the VIX Index, remains well below its five-year average. There’s a bit more greed than fear driving investors’ current psyche.
Most companies beat estimates
According to the J.P. Morgan Equity Strategy team, with over 80% of the S&P 500 having reported earnings, about 75% of companies are beating estimates. Earnings growth is running above 10%, beating by 7%. In Europe, for the Stoxx 600, 60% of companies are beating. Earnings growth is up about 1%, surprising by 4%. Far less exciting.
The Federal Reserve has emphasized the need for caution and humility in policymaking, with too much speculation about its next move. For now, the Fed is likely to wait and see how macro and micro indicators develop, as well as any tangible policy changes from Washington. A rate cut may not occur until later this year.
The global economy is showing signs of softening, raising the question of whether it is in the mid or late cycle. Current indicators suggest a shift towards the late cycle, with Europe experiencing anemic growth and the U.S. seeing above-trend but decelerating growth.
We are overweight in global credit, funded by core bonds, across multi-asset and fixed income portfolios. In the meantime, we are content to collect returns while waiting for policy developments in Washington and the subsequent responses.
Rick Barragan is the Managing Director,
Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
Source: “Insights from our CIO: Running to stand still,” by Richard Madigan, Chief Investment Officer, J.P. Morgan Private Bank
