While risks remain, we think prices could ease in the months ahead. To us, this means the consumer should be okay and inflation should continue to cool over the next year.
Madison Faller, Global Investment Strategist
Stephen Jury, Global Commodity Strategist
Our Top Market Takeaways for September 18, 2023.
Market update
The back-to-school flurry
Stocks swung on a jam-packed week.
Here are just a few things that happened:
- Chip designer Arm sprinted out of the gate on its much anticipated first trading day, marking the largest IPO of the year so far.
- Kicking off a slew of central bank meetings over the next week, the European Central Bank hiked on Thursday to its highest deposit rate ever. With growth now slowing after over 450 basis points of hikes in the last 15 months, policymakers signaled the move could be their last.
- After what’s been a tepid recovery, China may finally be seeing some green shoots. The latest round of data showed manufacturing activity and consumer spending were stronger than expected in August. This could be an early sign that all of policymakers’ piecemeal moves could be adding up to stabilize growth.
- The United Auto Workers began their historic strike at the Big Three Detroit automakers. So far, initial action is just at one plant per firm.
- Things heated back up in the latest U.S. inflation report. Headline CPI—which looks at the prices of a basket of consumer goods and services—accelerated to a 3.7% pace on the year (from 3.2% in July). Higher gas prices this summer were mostly to blame.
This bar chart shows the August CPI components month over month percentage change.
For headline CPI, it increased 0.60%.
For core CPI, it increased 0.30%.
For Energy Commodities, it increased 10.54%.
For Energy Services, it increased 0.22%.
For Food and Beverages, it increased 0.24%.
For Tobacco, it increased 0.65%.
For Medical Care (Core Goods), it increased 0.56%.
For New Vehicles, it increased 0.27%.
For Apparel, it increased 0.20%.
For Alcoholic Beverages, it decreased 0.01%.
For Used Cars and Trucks, it decreased 1.23%.
For Transportation, it increased 1.96%.
For Shelter, it increased 0.29%.
For Medical Care (Core services), it increased 0.06%.
To that last point, whether you’re driving, flying or cooling off your home in the late-summer heat, chances are you’re feeling some of the sting of higher fuel costs. Today, we dig into what’s behind the moves and whether they’re cause for concern.
Spotlight
Energy prices are going up: Should you be worried?
The price of oil is at its highest of the year, popping above $90 per barrel last week for the first time since November 2022. With oil up over +30% just since June, this has also pushed the prices of distillates such as petrol and diesel up along with it. The average price of regular U.S. gasoline is above $3.85 per gallon at the moment, up from around $3.50 just a few months ago. The UK and Europe are feeling it, too. Brits are paying 10% more in petrol costs just since June.
This chart shows the U.S. dollar price of a barrel of Brent crude oil from January 2021 to September 15, 2023. In January 2021, it was at 5$4. It increased to $69 in March 2021, before falling to $60 by the end of the month. It then rose to $77 in July 2021, then fell to $65 in August 2021. From there, it jumped to $86 in October 2021, and then decreased to $69 in December 2021. There was a rapid surge at the beginning of 2022 to $128 by March 2022, then mildly decreased to $98 in April 2022. It then fluctuated before increasing to $124 in June 2022 and then gradually falling over the next year to $72 by June 2023. Since then, there has been a spike to today’s level at $94.
First things first: What’s behind the moves?
Oil prices started to sink at the start of the summer. So to boost prices and support the market, OPEC+ (an organization of some of the largest oil-producing nations) swooped in with production cuts. Saudi Arabia and Russia have been at the center of the moves, extending their planned production cuts through December. Together, the broader OPEC+ group is now holding back 4 million barrels of crude per day—the largest production cut outside of a recession over the last two decades. So with less supply to go around to meet still red-hot demand, prices have been on a tear higher.
Could it get worse?
There’s always the chance of short-term spikes. But unless we see an unexpected geopolitical event, we think it would be hard to see prices over $100/barrel (which would look more eyebrow-raising). It comes back down to supply and demand:
- Supply: Higher oil prices could tempt other producers into action. It looks like independent producers in both the U.S. and Canada could boost supply by at least 500,000 barrels/day in the next few months. As U.S.-Iran relations thaw, Iran has also been sending more oil to the market.
- Demand: Despite growth in China slowing its roll, global demand for energy has held up at record levels. But as the heat dies down and folks phase out their summer travel, demand should cool. Climate patterns should help too. El Niño (a band of warm water that forms in the central and eastern Pacific Ocean) often leads to warmer winter weather in the U.S. The last time we saw an El Niño winter, oil demand fell more than 15%.
That’s all to say, risks remain, but we think oil prices will ease (likely toward the mid-$80s) as more supply comes online and demand slows. This should help temper fuel costs in the coming months.
What does it all mean?
There are two big worries: [1] higher oil prices will finally crack the consumer; and [2] higher oil prices will undo the progress that central banks have made on inflation.
On [1]. The worry goes that pain at the pump is coming at the worst time, especially for less affluent households. In the U.S., most consumers don’t have any pandemic-era savings left, more people seem to be turning to debt to keep up their purchases, and student loan payments are about to restart.
Those are real challenges, and more people may feel the pinch in their pocketbooks in months ahead, but we don’t think it’s enough to derail an otherwise strong consumer.
For one, most who want a job have one. The labor market is strong, and there are still 1.4 job openings available for every unemployed person (that number is also historically high in Europe and the UK). This means most consumers have reasons to keep spending. And even as more people use debt to finance their purchases, the overall ratio of household debt-to-income still looks healthy.
It’s also worth noting that energy prices may matter less than they used to. In 1974, U.S. consumers spent almost 10% of their wallet share on energy goods and services. Today, it’s around 4%. And excluding supervisors, the average U.S. worker can buy 7.5 gallons of gas per hour worked, more than they could for most of 2005–2014.
On [2]. Higher energy prices may add pressure to the next few inflation prints. But over the balance of the next year, we think inflation will keep cooling. More signs than not point to easing oil prices, and rent prices and other core services (which have been the stickiest drivers of inflation) are still easing, with ample room for progress. This should also help support incomes.
We don’t think these dynamics will change anything for the Federal Reserve at its meeting this week. We’d still say it’s more likely that policymakers go on pause, but with a caveat that markets are betting on a 40% chance of one more hike by the end of the year. Either way, the conversation seems to have decidedly shifted from “how high” central banks should hike rates to “how long” they will hold there. This means the key thing to watch this week will be the Fed’s view on the path of policy in 2024 (its “dot plot”), which could give us a sense for the timing and pace of any rate cuts.
Investment considerations
There’s always going to be something
The market stratosphere is full of reasons not to invest. But through all the challenges and risks, and even through periods of heightened optimism, investors who have stayed the course have benefited from growth, innovation and progress.
To us, a 60/40 portfolio of stocks and bonds remains one of the best starting points, offering the potential for growth and income. And to add an additional element of diversification, alternatives such as real assets can help protect against risks around inflation.
The chart describes the examples of “reasons” not to invest. It describes the cumulative returns of a 60/40 portfolio since a series of events (from 1999 to now).
Year Event Cumulative Total Return
1999 Y2K 340.3%
2000 Tech wreck; bubble bursts 293.8%
2001 11-Sep 295.4%
2002 Dot-com bubble: market down -49% 307.9%
2003 War on Terror – U.S. invades Iraq 347.8%
2004 Boxing Day Tsunami kills 225,000+ in southeast Asia 278.6%
2005 Hurricane Katrina 251.6%
2006 Not a bad year, but Pluto demoted from planet status 237.1%
2007 Sub-prime blows up 203.3% 2008 Global Financial Crisis; bank failures 182.7%
2009 GFC: market down -56%; depths of despair 277.2%
2010 Flash crash; BP oil spill; QE1 ends 218.9%
2011 S&P downgrades U.S. debt; 50% write-down of Greek debt 183.3%
2012 2nd Greek bailout; existential threat to Euro 178.1%
2013 Taper Tantrum 149.7%
2014 Ebola epidemic; Russia annexes Crimea 113.0%
2015 Global deflation scare; China FX devaluation 90.5%
2016 Brexit vote; U.S. election 87.9%
2017 Fed rate hikes; North Korea tensions 73.6%
2018 Trade war; February inflation scare 51.8%
Trade, impeachment inquiry, global growth slowdown 53.5%
2020 COVID-19 pandemic, U.S. Presidential Election 25.4%
2021 Omicron variant, China regulatory crackdown 10.0%
2022 Fed rate hikes, Russian invasion of Ukraine -5.6%
2023 More tightening, sticky inflation, debt ceiling drama, bank failures 12.0%
There is also a line in the background. The line describes the 60/40 returns indexed at 100 for the last day of 1998.
The first data point came in at 100 in December 1998.
It remained relatively flat and eventually went up to a high point at 158 in October 2007.
It then fell dramatically to 99 in March 2009.
Shortly after, it went up all the way until it peaked at 467 in January 2022.
Then it fell again to 373 in October 2022.
It then bounced back to 446 in July 2023.
The last data point came in at 440 in August 2023.
Your J.P. Morgan team is here to discuss what these dynamics mean for you and your portfolio.
RISK CONSIDERATIONS
• 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.
