Although Monday’s activity appears promising, the major event—Friday’s jobs data—looms, and the markets may have a challenging week. During this time, Wall Street has been closely examining the American economy and the new government’s capacity to prevent the stock market from going crazy.
Our call of the day comes from JPMorgan strategists, who are concerned that investors aren’t considering the possibility of economic volatility this year enough.
In a note to clients, a team headed by Mislav Matejka, head of global and European strategy, stated, “The risk is of a broadening air pocket in activity, where more aggressive trade, immigration, and fiscal consolidation policies could increase uncertainty, and ultimately affect payrolls.”
He and his colleagues rattled off an ever-expanding list of economic indicators that they believe are beginning to falter, including polls of service purchasing managers, retail sales, and consumer confidence. They also saw lower bond yields and a poor performance of cyclical equities—shares of businesses that often increase in value when the economy is doing well and vice versa—in comparison to defense stocks.
It is anticipated that heated consumer prices will keep the Fed from raising interest rates, but that could change, they said.
“Ultimately, the activity air pocket could lead to more forceful Fed support, drive the re-steepening of the yield curve and bullish equity market behavior, likely in the [second half] but not in the first instance,” according to the analysts.
The strategists reaffirmed their belief that “there are clear differences to the 2017 reflation template,” which was a reference to the period eight years prior when global stocks surged on expectations that Trump 1.0’s fiscal stimulus would spur economic expansion. They stated that uncertainty about the potential outcomes of policy changes is one of the reasons behind the consolidation observed by the S&P 500 SPX this time around.
“It is premature to believe that tariffs uncertainty has already peaked, and interestingly, even if not much sticks, the adverse impact on sentiment could still be the end result,” the strategists at JPMorgan said.
Where should I invest now? According to them, defensive equities should continue to do well in the meantime, before any Fed help is seen.
Because its strategists are still concerned about a highly concentrated market with high valuations, JPMorgan maintains a neutral stance on U.S. stocks in general. They consider the U.S. forward price/earnings ratio to be “very stretched,” at 22 times, but they also point out that the valuation discounts for China and eurozone stocks that were previously observed have mostly closed.
“Having said that, we do think U.S. activity will be stronger than the rest, and the U.S. market will likely benefit from animal spirits and deregulation,” the analysts stated.
There will probably be “less of a headwind for the U.S.” if trade uncertainty does increase. The United States usually fared better than other regions during risk-off periods when markets weakened.
Matejka and his team stated that the rotation out of large U.S. technology and growth companies is one trend that is probably going to continue for U.S. markets. The bank recommended switching from semiconductors to software last summer after closing out a bullish position on the growth theme.
