Broker Check

JP Morgan Call Summary - Q3 2017

July 13, 2017

Themes and Strategies for the 9th Year
of Economic Expansion  

Summary of the JP Morgan 3Q Guide to the Markets Call 



This Could be the Longest Expansion Ever
Fed Policy Will Cause Long Term Rates to Increase
Why and How to Hold Fixed Income
How to Take Advantage of International Equity and Bond Markets
This Could be the Longest Expansion Ever


Slide 17 – The length and strength of expansions
Currently, we are in the third-longest expansion since the civil war. It is important to keep in mind that the business cycle is not a regular pattern. Our current business cycle has been long and slow. The slow speed of this cycle may help us continue on a period of expansion and make this the longest expansion ever. During an expansion, there are two main factors that lead to a recession: slowing and overheating. Right now, there is no evidence of either.

Slide 20 – Cyclical sectors
Cyclical sectors are either above or below average levels and do not show a trend towards a slowing or overheating economy. From these graphs, we can assume a continued slow expansion.

Slide 24 – Federal finances
Although moderate, economic growth is decreasing unemployment. The labor market is the tightest it has been in recent history. 

Fed Policy Will Cause Long Term Rates to Increase


Slide 33 – The Federal Reserve balance sheet
The Federal Reserve announced at the June meeting they are likely to reduce the balance sheet by $600 billion dollars per year starting in the near future. While the actual amounts were stair-stepped, the average amount added to the balance sheet per year was $600 billion during quantitative easing. Decreasing the balance sheet by this rate will inevitably push long-term interest rates higher.
Slide 27 - Inflation
Current rate hikes are not due to inflation. In the past, the Fed has used rate hikes as a way to slow inflation, however, inflation is trending down during this series of rate hikes. In fact, Core CPI is expected to level out around 2% (well below the 50-year average of 4.1%). Today, inflation is not the problem, the Fed is now using interest rates as a weapon against bubbles. 

Slide 47 – Global monetary and fiscal policy
International banks have also been building up their balance sheets. Now banks are planning on lowering their balance sheets this year which means interest rates will move higher globally. 

Why and How to Hold Fixed Income


Slide 35 – Fixed income yields and returns
Even with low rates, clients should hold fixed income, but they must be strategic. Convertibles, floating rate, and US high yield bonds do well in rising rate environments and should be overweighted. However, these types of bonds have high correlations to the market and clients still need to maintain diversification outside of convertibles, floating rate, and US high yields bonds.

How to Take Advantage of International Equity and Bond Markets

Gabriela Santos

Slide 46 – Global reflation
Global growth is the highest since 2011, but is the growth over? No, the backdrop is very positive for continued global growth.

Slide 44 – Manufacturing momentum
Manufacturing is doing really well, even without the US. The global PMI is 52.6, the highest in 6 years, and the US is below global PMI first time since Jan 2011. Manufacturing is growing outside the US and is expected to continue. 

Slide 45 – Global inflation
Right now, inflation is cooling off in emerging markets and heating up in developed markets. This inflation trend is a positive indicator for global growth because it indicates currencies are stabilizing in emerging markets and labor markets are tightening in developed markets. 

Slide 41 – Global equity markets
Year-to-date, the US equity market is behind EAFE and Emerging Markets. Also, note that global equity Correlations are coming down. With correlations low, owning a global portfolio increases diversification.

Slide 42 – US and international equities at inflection points
Many clients may be asking ‘have we missed the EX US boat?’ No, there is evidence to suggest it may only be just beginning. In a similar way that the US escaped its sideways market, international markets are just beginning to break their sideways market. 

Slide 43 – European recovery
The graph on the left shows that earnings are picking up around the world and internationals have room to grow when compared to previous levels.

Slide 48 – European recovery
PMI and GDP growth are both picking up in Europe, unemployment is the lowest it has been in 8 years, and credit demand is growing. These stats indicate that Europe is thriving and no longer just surviving. 

Slide 36
Don’t forget about global fixed income. Today, international fixed income constitutes roughly 60% of all fixed income. Also, foreign fixed income can help reduce correlations. 

Summary Compiled by Matt Dallas, Program Manager at Cognetio