Article by JPM Private Bank
U.S. Head of Investment Strategy Jun 15, 2021
The economic reopening has exceeded expectations. Here are seven trends to watch in the coming months.
Vaccines and seasonality have crushed COVID-19 in the United States. Auto and air travel are soaring, though commuters are still wary of coming back to the office. The housing market, recently boiling, is still hotter than it has been in over a decade. Tremendous demand for goods is overwhelming ports on the West Coast. The economic boom that has come with reopening has rekindled inflationary expectations after years of sluggishness and pessimism. And through it all, the Federal Reserve (Fed) has remained committed to stoking a hot economy, and corporate earnings are surging.
That sums up the important trends we’re watching carefully. Below, we share the seven charts that show these trends and the data we’ll be monitoring to assess the evolving state of the economy and financial markets, and where they’re likely to be heading next.
Chart 1: The pandemic: When will COVID-19 be under control globally?
Israel, the UK, the U.S., and Europe have vaccinated over 40% of their populations, and that level seems to mark a vaccine-penetration turning point, since the number of new cases in these places has crashed. The rest of the world needs to get there. When will that happen?
Unfortunately, at the current pace, the rest of the global population probably won’t catch up until well into 2022.
Vaccine rollouts continue to make progress
Sources: Our World in Data, Bloomberg Finance L.P., JPMorgan Markets and Asset Class Strategy. Data as of June 9, 2021.View info
Investment implications: The U.S. has reopened but Europe has not. That suggests that European equities could still offer value, as earnings expectations seem too low. Investors may consider rebalancing toward European equities and considering European long-dated call warrants and, tactically, the German and U.K. equity markets.
Chart 2: U.S. mobility: When will airline and public transportation recover?
Car travel has bounced back to well above pre-pandemic levels but airlines and public transit trips still have a long way to go.Commuting, measured by NYC subway ridership, is still 60% below pre-pandemic levels—we expect a slow move higher through the summer and the fall. Air travel should continue to recover throughout the summer. Given that jet fuel accounts for 10% of crude oil demand and that auto travel is strong, we expect energy prices to be well supported through the end of the year.
Airline travel in and from the U.S., and public transit, are still depressed
Sources: Bloomberg Finance L.P. Apple; data as of June 12, 2021. U.S. airline travel data is based on number of Transportation Security Administration screenings.View info
Investment implications: Investors may consider harvesting yield through crude oil structured notes, and tactically buying select U.S. energy equities and Russian shares.
Chart 3: The U.S. housing market trends: How long can the boom last?
A hallmark of the recovery from the global financial crisis was U.S. housing market weakness. Today, by contrast, home sales are booming. If strength in the housing market continues, it could contribute to multiple quarters of above-trend GDP growth in the U.S.
That matters: The housing market is critical for the economy. Every dollar spent on housing generates five dollars of economic activity. Surveys show that consumer plans to purchase new homes are at the highest level in over 10 years.
The housing market: Off the boil but still booming
Sources: Conference Board, Haver Analytics, J.P. Morgan Private Bank Market and Asset Class Strategy. Data as of May 31, 2021. View info
Investment implications: This cycle isn’t like the last. Value, and cyclical sectors such as banks, homebuilders, materials and industrials, could all benefit from above-trend growth.
Chart 4: Supply chain trends: When will they normalize?
A surge in goods imports led to backlogs at West Coast ports. Now there are tentative signs that some of these stress points are easing. Shipping backlogs appear to be past peak and key goods, like semiconductors, are arriving at their destinations. If supply can start to catch up to demand, that should help ease the inflationary pressures that have some investors spooked.
Shipping bottlenecks are easing
Source: Marine Exchange of Southern California & Vessel Traffic Service L.A.-Long Beach. Data is as of May 23, 2021.View info
Investment implications: We view semiconductor and mega cap tech stocks as buys. These sectors’ earnings have been remarkable yet the stocks have lagged—in no small part due to inflation fears.
Chart 5: Inflation expectations: How will we know if it’s more than transitory?
Inflation is as much a psychological phenomenon as an economic one. We believe that we understand the economic side pretty well, and it doesn’t look threatening.Common inflation expectations (an index created by Federal Reserve researchers) are currently very well anchored. However, if the index of common inflation expectations that we’re watching rises materially higher, the situation would be very different.
Inflation is largely driven by the labor market and shelter prices. Given that neither of those pieces of the equation look worrisome, we think the current inflation spike will be transitory. On the psychological side, it would take a big move higher in inflation expectations to get the Fed worried.
Common inflation expectations are very well anchored
Sources: J.P. Morgan, Federal Reserve Board, Goldman Sachs, JPMorgan Market and Asset Class Strategy. Data as of May 30, 2021. View info
Investment implications: We expect Fed policy should stay very easy until at least the end of 2023. Investors may consider finding yield by relying on active management investing in short-duration core and core-plus fixed income, and extend credit with preferred equities, leveraged loans and private credit.
Chart 6: The Fed: When will members start talking about removing policy support?
Accommodative Federal Reserve policy and rising inflation expectations have driven inflation-adjusted yields to their lowest levels on record. Lower inflation-adjusted yields incentivize economic activity because they encourage savers to find riskier uses for their money, like investing in a business or equity markets. Higher real rates come when the Fed wants to tighten policy to slow the economy down due to the threat of inflation.
If the Fed removes accommodation abruptly, real interest rates could move sharply higher. But it’s not just tightening that can move rates—“taper talk,” simply Fed policymakers discussing reducing their asset purchases—could lead to a rise in Treasury yields at the short end of the curve, and higher real interest rates.
Five-year inflation-adjusted yields are at all-time lows
Source: Bloomberg Finance L.P. Data as of June 11, 2021. View info
Investment implications: Core fixed income does not offer the same amount of protection it used to. Rely on dynamic active management from liquid markets and hedge funds as buffers against potential equity volatility.
Chart 7: Equity markets: How much money can S&P 500 companies earn?
Earnings per share estimates are up almost 20% year-to-date, but we think they will keep climbing. Why? Because strong economic growth, pent-up demand and operating leverage should power corporate earnings higher. The stock market will likely follow.
A key tenet of our 2021 outlook was that earnings growth would drive stock markets to new highs. We believe that trend will continue through the second half of the year.
Analysts are likely still underestimating the S&P 500
Source: Factset. Data as of June 11, 2021. View info
Investment implications: In our view, equities are entering the growth phase of the market cycle, when earnings growth is the predominant driver of equity returns. We think it’s best to stick with an overweight to stocks relative to bonds.
The path forward
The global economy is anything but normal. Economic reopening has exceeded expectations, and we are likely to see the strongest global growth in over 30 years. However, we believe that as we continue on the winding path to a post-pandemic world, markets and the global economy will get much more normal.
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Article by JPM Private Bank