What the beginning of the year might tell investors about how we’ll finish 2023
Our Top Market Takeaways for May 25, 2023
Market update
Rolling, rolling, rolling on the river
We’ve already seen a lot in 2023. But through all of the challenges and angst, markets are, for the most part, holding their ground.
Today marks the 100th trading day of the year. With that in mind, today’s note considers what the beginning of the year has taught us, and what that might suggest for how it will finish.
So, we’re 100 days in and…
…the debt limit dilemma still isn’t resolved.
Things are getting down to the wire, with just seven days until Secretary Yellen’s estimated June 1 X-date. Given all that’s at stake, we continue to think a deal that raises or suspends the debt ceiling is the most likely path from here. Otherwise, a scenario that sees the government crash through the X-date but continue to make its debt payments (at the expense of more discretionary spending such as education or transportation) would feel a lot like a government shutdown, while the worst-case scenario of actual default (meaning the government never pays back its creditors) would be even more calamitous—neither have ever happened in the century that the debt ceiling has existed.
Democrats and Republicans have both noted progress in negotiations this week, but there still seems to be a wide divide on several key issues heading into the long Memorial Day weekend. Rating agencies are also now kicking up some dust, with Fitch putting the U.S.’s AAA credit rating on its downgrade watchlist yesterday—a move reminiscent of 2011’s episode.
Yet, the media noise may be louder than the risk markets hear. Outside of Treasuries and credit default swaps (which offer insurance against the risk of potential of default), broad markets haven’t been too roiled.
…bank worries are coming and going, but the Federal Reserve still seems divided.
It’s been almost a month since the last bank failure (and 11 weeks since all the bank drama kicked off). Questions over further ripple effects and the future of the regional banking industry remain, but much of the discourse around bank runs and a crisis of confidence seems to have moved on. A sign of the times: While the S&P 500 is having its worst week since March, the KBW Bank Index is in the green (on top of its best week since October last week).
Rather, the balancing act for central bankers seems to be between preparing for the effects of tightening credit conditions and tackling still elevated inflation. The latest Fed meeting minutes, which offer a peek behind the curtain of the May policy meeting, suggested policymakers may be done hiking rates. Yet, rhetoric from Fed speakers over the last week has signaled that even if a pause comes in June, a few more hikes may be needed to once and for all claim victory against inflation. The one consistent message has been pushing back on rate cuts—and it seems to be working: Markets have priced out almost all of the cuts they were baking in for this year—just ~25 basis points today versus ~80 basis points only three weeks ago.
Markets are pricing in fewer cuts than just a few weeks ago
This chart shows the Fed funds futures implied policy rate today and on May 4, 2023. For the line that represents today’s line, the first data point came in at 5.1% currently in May 2023. Later it trends up until it reached 5.3% in July 2023. Then it went on a downward ramp until the last data point at 4.9% in December 2023. For the line that represents May 4’s line post-fed meeting, the first data point came in also at 5.1% currently in May 2023. Later it went down all the way until the last data point at 4.2% in December 2023. There is an arrow in between the two lines saying “the market has priced out cuts over the last several weeks.
Either way, whether it takes a few more hikes or not, markets are still betting on the Fed getting things back in balance.
…Corporate America is doing just fine.
Q1 earnings season was far better than feared, even as it still showed a slowdown. Every sector but utilities bested profit expectations, and tech in particular blew it out of the water (look no further than NVIDIA’s stellar report this morning). Economists and Wall Street (us included) have been chattering about a potential recession for the last year, and that’s given Corporate America ample time to prepare, taking on cost cuts and refocusing to protect profits.
A recession still looks probable to us, but companies seem to be either less worried about it, or at least feel better prepared. While a few S&P 500 companies are still due to report in the coming days, those throwing out the “recession” buzzword have now declined for three straight quarters.
Companies aren't citing "recession" as much as before
This chart shows that fewer companies are citing recession on their earnings calls, and shows the number of times “recession” was mentioned from Q2 2018 through Q1 2023. In Q2 2018, there were 27 mentions; in Q4 2018, this rose to 60, and by Q1 2019, it was 31, and Q2 2019 it was 40. It shot all the way to 210 in Q1 of 2020 and then subsequently steadily came down all the way to 14 in Q4 of 2021 before shooting up again to 112 in Q1 2022, and then 238 in Q2 2022. It has steadily decreased, and most recently the count was 107 in Q1 of 2023.
…stocks are higher thanks to it.
It might be a tough week with all the debt ceiling drama, but the S&P 500 is holding onto a +8% year-to-date gain. While history is never a guarantee of future returns, that big of a gain at this point in the year tends to suggest there’s more green ahead. When the index has been +8% or more higher on Day 100 in the past (going back to 1950), the full year return has been positive in every instance, up on average +24%.
History suggests when the market is this high (>8%) on Day 100 of the year, there may be more green to be seen
The table shows the S&P 500 returns in years where the market was higher than 8% on Day 100 of the year. In three ways: YTD Return on Day 100, Rest of Year Return, and Full Year Return. For YTD Return on Day 100, the first data point came in at 11.3% in 1950. Then the Rest of Year Return came in at 9.4% in the same year. While the Full Year Return ended up being 21.7% in that year as well. For 1954, YTD Return on Day 100: 16.4%, Rest of Year Return: 24.8%, Full Year Return 45.3% For 1958, 10.2%, 26.6%, 39.5%. For 1961, 15.8%, 6.4%, 23.1%. For 1963, 11.1%, 7.2%, 19.2% For 1967, 14.6%, 4.8%, 20.1% For 1971, 9.8%, 0.8%, 10.6% For 1975, 34.1%, 0.1%, 34.3% For 1976, 12.7%, 6.2%, 19.7% For 1983, 15.5%, 1.7%, 17.5% For 1985, 14.1%, 11.4%, 27.1% For 1986, 12.1%, 2.6%, 14.9% For 1987, 14.3%, -11.2%, 1.5% For 1989, 15.7%, 10.0%, 27.3% For 1989, 15.7%, 10.0%, 27.3% For 1991, 13.3%, 12.0%, 26.9% For 1995, 13.0%, 18.6%, 34.1% For 1996, 8.6%, 10.7%, 20.3% For 1997, 11.6%, 15.3%, 28.7% For 1998, 15.3%, 9.8%, 26.6% For 1999, 8.7%, 9.7%, 19.3% For 2013, 18.8%, 10.9%, 31.8% For 2019, 14.3%, 13.8%, 30.0% For 2021, 11.4%, 14.6%, 27.7% For 2023, 9.2%, ?, ? For average, Rest of Year Return came in at 9.2%, and Full Year Return came in at 24.2%. For median, Rest of Year Return came in at 9.8%, and Full Year Return came in at 24.9%. For % higher, Rest of Year Return came in at 95.8%, and Full Year Return came in at 100%.
…and it’s not just big tech, either.
To be sure, big tech has been a powerhouse. But the strength is broader than that. Consumer and travel names such as Royal Caribbean (+56%), Uber (+53%) and Booking (+30%) are some of the brightest spots. Semiconductors are up over +20%. Homebuilders are up some +16% so far this year. Seventeen countries are also outperforming the United States.
17 MSCI Country indices are outperforming the U.S. so far this year (+8% or more)
This chart shows the performance of countries across the MSCI Index YTD. MSCI Greece has returned 31%, MSCI Ireland 22.8%, MSCI Egypt 22.3%, MSCI Czech Republic 20.2%, MSCI Mexico was 18.4%. Compared to the United States, which has returned 8.1%. Some of the countries notching negative performances YTD include MSCI Qatar at -2.3%, MSCI Israel at -3.5%, and MSCI Colombia at the back of the pack with 16.6% YTD performance.
To that end, Michael Cembalest, our Chairman of Market and Investment Strategy, has long called for barbelling an overweight to the United States and Emerging Markets, and an underweight to Europe and Japan. While that’s proved fruitful in the last decade or so, the tide’s turned this year. With Europe besting the United States by almost 3% year-to-date for dollar investors, and Japan hovering near three-decade highs, he’s retiring the barbell, at least for now.
The tide is turning: The U.S. & EM vs. Europe & Japan barbell
Area chart shows the 2-year rolling barbell performance versus the MSCI All World Index for an overweight to U.S. and EM, and underweight to Europe and Japan from March 1991 to May 2023. The chart shows that performance has been positive for most of this period. However, since March 2023, the barbell has underperformed by -1.20%.
In all, while the slate of known unknowns seems full, the key when it comes to investing is balance—and multi-asset portfolios are designed to provide just that.
Your J.P. Morgan team is here to help.
All market and economic data as of May 2023 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
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