Shifting consumer behavior, IPO activity, labor strikes and more might not be getting the attention they deserve.
Our Top Market Takeaways for August 11, 2023
Market update
What’s the market missing?
The market has been pretty distracted, with stocks wavering and bond yields swinging the last couple of weeks. While low summertime liquidity also plays a role, investors seem to be latching on to any “reason” they can find to question the path ahead—and to that end, this year’s big debates around inflation and monetary policy, bank stress, government debt and China’s growth slowdown all feel tired.
So what are we not talking much about that we should be? Today, we take a quick look at a few dynamics that we think offer promise, and others that could have the potential to trip up investors.
The good:
- Consumers are starting to spend a little more on goods and a little less on services.
Yesterday’s U.S. CPI report signaled that while inflation continues to cool, sticky services prices are eyebrow-raising. Yet this earnings season could be hinting at some progress. With “reopening” now old news (much of the world has been back in the swing of things for almost two years), consumers’ appetite to spend on travel and leisure is starting to chill out, while interest in goods is slowly picking back up.
Both PayPal and Amazon noted that e-commerce is accelerating, with shifting consumer preferences in mind. Meanwhile, Expedia and some airline companies (such as Alaska Air, Frontier, JetBlue) have signaled cooling domestic travel spending, with hotels losing some steam too. Some of that is starting to show up in the official inflation data (airfares have been dropping), but with services inflation as a whole still running at a hot clip, there’s more progress to be made. If so, that’s good news for the Federal Reserve.
Services are still the stickiest part of inflation
The chart describes the % year-over-year U.S. headline CPI inflation and the contributions of the four sub-segments (energy, food, core services, core goods) to the % YoY U.S. headline CPI inflation. First, for the line that describes the % YoY U.S. headline CPI inflation, the first data point came in at 1.4% in January 2021. Then it trended up until it peaked at 9.1% in June 2022. Later it fell and reached its bottom at 2.99% in June 2023. The last data point came in at 3.18% in July 2023. For the energy sub-segment’s contribution to the headline CPI (stacked area), the first data point came in at -0.24% in January 2021. It slowly grew and reached its peak at 2.98% in June 2022. Then it came all the way down and bottomed at -1.54% in June 2023. The last data point came in at -1.1% in July 2023. For the food sub-segment’s contribution to the headline CPI (stacked area), the first data point came in at 0.52% in January 2021. It slowly grew and reached its peak at 1.58% in August 2022. Then it fell until it troughed at 0.66% in July 2023. For the core services’ sub-segment’s contribution to the headline CPI (stacked area), the first data point came in at 0.77% in January 2021. It went up until it peaked at 4.18% in February 2023. It then declined and the last data point came in at 3.45% in July 2023. For the core goods’ sub-segment’s contribution to the headline CPI (stacked area), the first data point came in at 0.34% in January 2021. It then went up until it peaked at 2.48% in February 2022. Then it declined all the way and found its trough at 0.17% in July 2023.
- IPOs could be quietly staging a comeback
In 2022, we saw the least amount of money raised for new public companies in at least two decades. There’s a myriad of reasons why—from long-term frustration about the complexity and costliness of the process to short-term headwinds such as market and business uncertainty. But buzzy debuts from the likes of Mediterranean restaurant chain Cava (which saw its price double on its first day of trading in June) and a handful of planned new listings—from corky shoemaker Birkenstock to grocery-delivery guru Instacart—could signal that competition in the IPO market is slowly heating back up. Risks always abound with companies going public (the poor performance of 2020–21 is a case in point), but with more clarity on the direction of the economy and corporates generally still on sound footing, the market could be in the nascent stages of rebuilding.
2022 marked a big lull in IPO activity
This bar chart shows the IPO (Initial Public Offering) proceeds excluding SPACs (Special Purpose Acquisition Companies) from 2010 to 2023, and the numbers of IPOs each year. The values for each year are: • 2010—IPO proceeds = $36.2bn; number of IPOs = 93 • 2011—$34.1bn, 95 • 2012—$39.2bn, 108 • 2013—$51.4bn, 165 • 2014—$55.8bn, 207 • 2015—$32.2bn, 129 • 2016—$16.4bn, 73 • 2017—$29.5bn, 116 • 2018—$36.2bn, 134 • 2019—$43.0bn, 114 • 2020—$72.7bn, 164 • 2021—$136.1bn, 297 • 2022—$7.5bn, 22 • 2023 YTD—$8.0bn, 13
- The economy might be getting more productive.
When an economy is more “productive,” it’s using all the resources it has—from all its workers and its capital, such as buildings and equipment, to its technological investments—more efficiently than it used to. This has the potential to transform the way households live and the way firms do business. Measuring productivity can be tricky, but one way is to look at how much employees are producing per hour. Last quarter, labor productivity rose at a 1.3% pace over the last year—while that’s not blockbuster growth, and one data point doesn’t make a trend, that’s above the 1% annualized rate of the last decade.
Looking forward, the picture could be coming into clearer focus. Boosts to productivity such as those we saw in the 1990s tend to come after big booms in business investment. Already, the intense focus around artificial intelligence is driving meaningful investment in software to enable its use. To quote our own Michael Feroli, “So far, the prospects in this cycle look promising…[and] if we are to see an AI-driven resurgence in productivity, the business sector is already doing its part.”
Spending on technological innovation is on the up
The chart describes U.S. private investment by category as a % of GDP. For the research & development line, it started at 1.51% in March 1990. It trended up until it peaked at 1.96% in December 2000. Then it slightly came down and bottomed at 1.69% in December 2004. Shortly after it rose steadily all the way until the last data point, which came in at 2.75% in June 2023. For the software line, it started at 0.76% in March 1990. Soon it rose to 1.55% in March 2001. Then it came back down slightly to 1.34% in June 2003. Then it went up all the way until the last data point, which came in at 2.27% in June 2023.
The not-so-good:
- Cooling inflation could put some pressure on corporate earnings.
Even as inflation soared, many companies managed to protect their profits through passing price increases on to their consumers. Think luxury goods conglomerate LVMH, which consistently saw strong demand for its brands—so much so that it’s become the most valuable company in Europe. Or Netflix, which still saw a huge spike in subscribers after cracking down on password sharing. But with inflation now cooling, some worry that kind of pricing power could be losing strength.
Despite the angst, we’d note this isn’t actually a new trend. We’ve already seen this kind of weakness in areas that people overbought during the pandemic, such as consumer electronics and housing-related goods. It seems natural for momentum to start waning in some pockets such as consumer staples or services (to our point earlier). What’s more, earnings expectations for the future are rising, not falling—this quarter looks to mark the trough in S&P 500 earnings growth, and it’s still shaping up better than expected. All that to say it's something to watch, but the push-and-pull probably comes on the sector level.
- Labor strikes have been rearing their heads.
Workers across the world have been going on strike for better pay. From delivery drivers and hotel workers to actors and writers, there have been over 170 work stoppages in the United States this year, according to Bloomberg Law’s database. 2022 also marked the first time since 2005 that the country saw over 300 strikes. With the labor market as tight as it is (the U.S. unemployment rate is near historic lows at 3.5%) and inflation still higher than is comfortable, more challenges may arise. That can be disruptive to households and businesses alike. Yet, the recent tentative deal between UPS and the Teamsters shows compromises can be found, and for what it’s worth, the biggest impact stands to be felt more within the companies in focus, rather than corporate America as a whole.
- Student debt payments are kicking back into gear.
Following a three-year-long pause, interest payments on federal student loans will resume next month. This also comes at a time when excess savings have been exhausted for most households, interest costs are higher, and things in general are still expensive. In examining households with the biggest student debt burdens, the largest impact will likely be on millennials. This stands to pinch pocketbooks, but when we look across demographics and across the income spectrum—and account for all the other factors that could influence spending—it doesn’t look like enough to break the broad consumer’s back.
Where we stand:
In any given year, there are good things and bad things that impact the economy and markets. And while we tend to see the glass half full when we examine the current slate of opportunities and risks, we’re also reminded that volatility is normal.
A balanced 60/40 portfolio1 has suffered an average intra-year pullback of 10% over the past four decades…and so far, this year’s maximum drawdown has only been ~6% (back in March). Yet the full-year return has been positive in 32 of those 43 years since 1980—suggesting that staying invested over the long run has paid off. Unfortunately, investors tend to sell during the dips and miss the recovery—already, flows into cash and out of stocks have been meaningful this year. But when investors are fearful, that is often the time to pounce.
Your J.P. Morgan team is here to discuss what this means for you and your portfolio.
1A 60/40 portfolio allocation refers to 60% S&P 500 Index and 40% Bloomberg U.S. Aggregate Index.
RISK CONSIDERATIONS
Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Bloomberg Global Aggregate Index provides a broad-based measure of the global investment grade fixed-rate debt markets. The Global Aggregate Index contains three major components: the U.S. Aggregate (USD 300mn), the Pan-European Aggregate (EUR 300mn), and the Asian-Pacific Aggregate Index (JPY 35bn). In addition to securities from these three benchmarks (94.1% of the overall Global Aggregate market value as of December 31, 2009), the Global Aggregate Index includes Global Treasury, Eurodollar (USD 300mn), Euro-Yen (JPY 25bn), Canadian (USD 300mn equivalent), and Investment Grade 144A (USD 300mn) index-eligible securities not already in the three regional aggregate indices. The Global Aggregate Index family includes a wide range of standard and customized subindices by liquidity constraint, sector, quality, and maturity. A component of the Multiverse Index, the Global Aggregate Index was created in 1999, with index history backfilled to January 1, 1990. All indices are denominated in U.S. dollars.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
- Past performance is not indicative of future results. You may not invest directly in an index.
- The prices and rates of return are indicative, as they may vary over time based on market conditions.
- Additional risk considerations exist for all strategies.
- The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
- Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
