Sometimes, with so much going on in the global marketplace, a bit of simplicity can go a long way towards helping an investor figure out what to do.
The cross-asset strategy team atJPMorganrealizes this and has arrived at a four-part framework to help traders wrap their heads around what will transpire in the second quarter.
At the core of the firm’s outlook is the idea that fears surrounding theyield curveare overblown. To hear JPMorgan tell it, the relative levels of Treasury yields are not as closely tied to market action as many investors think.
“Since curve shape is a symptom of the macroeconomic setting and not the driver of financial conditions or returns, this Q2 outlook focuses instead on four underlying issues that will determine cross-asset performance,” John Normand, JPMorgan’s head of cross-asset fundamental strategy, wrote in a client note.
When viewed collectively, these catalysts should be all an investor needs to understanding in order to crush the market in the second quarter. And while fully comprehending them is easier said than done, perhaps the following commentary from JPMorgan will help.
1) Will global growth be revived?
JPMorgan says economic expansion might pick up in the coming months because of three main policy changes:
- A Fed pause that loosens financial conditions
- Easing in China that results in a high likelihood that the economy keeps growing at a consistent pace
- A US-China trade truce normalizes signals like corporate spending.
2) Will corporate earnings increase?
JPMorgan notes that if global growth recovers, that should also lift corporate profits. And given that earnings forecasts currently look rather low, the firm thinks there could be decent upside here.
Even the firm’s biggest pessimists are finding it difficult to get too bent out of shape about the state of earnings.
“Within JPM there are differing views on margins, but even the most conservative view is for a bias lower rather than a multi-point contraction,” Normand said.
He continued: “Importantly, some high-frequency monthly proxies for margins remain firm, and equities have tended to correlate slightly better with EPS growth that margins.”
3) Will central banks validate the easing priced into yield curves?
After pricing in a set number of rate hikes for much of 2018, the market has changed course and now expects theFederal Reserveto cut lending costs this year.
“With the US curve pricing a cut by end-2019 and two more by end-2021, a Fed that does nothing can suddenly become a market event,” Normand said. “Given that investors appear to be quite long of Treasuries and EM assets, the possibility of a destabilizing steepening of the US curve is a major risk for Q2.”
JPMorgan says the following chain of events could occur during such a repricing: firmer US growth, no additional dovishness from the Fed, higher US rates, a stronger dollar, weaker EM assets, and weaker US stocks.
Normand added: “Though all of these corrections are probably only intra-month if growth supports earnings and the Fed continues signaling no hikes until well into 2020.”
4) What’s next on the political/geopolitical front?
When it comes to geopolitical drivers, it’s really a grab bag that depends on the day.
There’s the Trump administration, which appears to have dodged a bullet in the form of an underwhelming Mueller report. There’s also the debt ceiling debate, but JPMorgan says that’s more of a third-quarter concern than anything that will strike markets in the near term.
Looking globally, the firm expects the ongoing US-China trade conflict to be more of a drag on specifically vulnerable companies, rather than the entire market. There’s also the Brexit fiasco.
JPMorgan also highlights the oil market as a potential flashpoint. Normand says a “destabilizing” move towards $80 a barrel for Brent crude could have wide-reaching effects.