There were positive gains in US growth stocks this year while almost everything else was flat/down; the chart below tells the story. While we expect US GDP and profits to continue to rise in 2019, in most business cycles, asset prices peak a year or so before corporate profits and the economy do. In other words, a rising economy and rising profits often don’t translate into rising asset prices this late in the cycle, particularly with the US President channeling Andrew Jackson and Hoover instead of Reagan (see links below). We will review all of this in our 2019 Outlook, released as usual on January 1st. The biggest binary issue for investors: the long-term US trade and political conflict with China, since I can imagine a substantial market recovery or decline based on how it plays out. Looks like a low single-digit return year in 2019 at best, after -3% to 1% returns on diversified stock-bond mixes in 2018.
At this time each year, I depart from standard investment commentary to write something different. This year, the Holiday Eye on the Market is a note to my spouse on the 2020 US Presidential election. Please skip this note and read one of the pieces below if politics raises your blood pressure to unacceptable levels. Happy New Year.
Select Eye on the Market topics, 2018
How business cycles end, and the twilight of the largest monetary intervention in history
2018 Eye on the Market energy paper: fact and fantasy along the road to de-carbonization
On private equity dry powder: implications for investors of growing committed and unspent capital
The State of the States: the full cost of unfunded pension and retiree healthcare obligations
Midterms: adjusted for economic and market conditions, the worst incumbent House loss in 100 years
Trumpism for Investors: Themes and parallels to prior US Presidents, from Jackson to Bush
I know you have a vision, a hope, I’m not sure what to call it, that goes something like this: in 2020, a moderate defeats the President in the GOP primary and a moderate wins the Democratic primary, with both candidates reflecting the homespun values of your father, raised in rural Indiana (Kewanna, pop. 600) in the 1930s before serving as head of surgery for the 121st medevac hospital in Korea, the Chief of Surgery at Northwestern Hospital and as one of the team doctors for the Chicago Cubs. My response? As you say to me in moments of my own delusions: “good luck with that.” If the political pendulum swings, it may swing pretty far. The chart shows the degree of liberalism/conservatism by administration since 1924. Given the ideological intensity of the Trump administration and of progressives in the Democratic Party, you may face a choice in 2020 that reflects the extremes of the last 100 years rather than the middle, at least as it relates to the liberalism/conservatism measure shown below.1
Who's included in each administration's score
2020 Ultra-progressives: Warren, Sanders, Harris, Booker
2020 Progressives: S. Brown, Giilibrand, Merkley
2020 Moderates: Bennet, Biden, Casey, Klobuchar, O'Rourke
Trump admin: Cotton, Graham, Hatch, McCarthy, Meadows, Paul, Perdue, Ryan, Scalise, Sessions
Obama admin: Biden, Durbin, H. Clinton, Kennedy, Kerry, Obama, Pelosi, Reid, Waxman
GWB admin: Ashcroft, Blunt, Cheney, DeLay, Kyl, McConnell, Santorum
Clinton admin: Bentsen, Carper, Chiles, Gephardt, H. Ford, Nunn, Robb
Reagan/Bush admin: Baker, Bush, Dole, Kemp, Latta, Laxalt, Lugar, Michel
Carter admin: Bayh, Byrd, Hawkins, Mondale, O'Neill, Wright
Nixon/Ford admin: Ford, Lott, Percy, Rhodes, Sandman, Scott, Wiggins
JFK/LBJ admin: Bolling, Humphrey, JFK, Johnson, Mansfield, McCarthy, McCormack
Eisenhower admin: Dirksen, Dulles, Flanders, Nixon, Saltonsall, Smith, Taft
FDR/Truman admin: Barkley, Black, Byrns, Garner, Guffey, McCormack, Robinson, Sabath, Truman
Coolidge/Hoover admin: Curtis, Hawley, Longworth, Moses, Tilson, Watson
Methodology: Each administration's ideology is based on politicians we selected (left), which include members of its Executive Branch with Congressional voting histories, and prominent members of Congress that supported major legislative initiatives of that administration, and/or defended its political and governing principles. The dots show the average for the group, and were computed using Nokken-Poole first dimension Voteviewdata, sourced below. In general terms, Voteview scores reflect the ideological intensity of politicians by looking at how frequently they voted with their bloc . Please see appendix for details. Data: Jeffrey Lewis, Keith Poole, Howard Rosenthal, Adam Boche, Aaron Rudkin and Luke Sonnet (2018).Voteview: Congressional Roll-Call Votes Database. Michael Cembalest, J.P. Morgan Asset Management, 2018.
What the chart measures. The underlying data measure the liberalism or conservatism of politicians based on their voting patterns in Congress, and have been used since the 1980s in peer-reviewed studies on public policy, the legislative process and polarization (see p4). The chart conveys the intensity with which each Administration and its prominent supporters in Congress adhere to a liberal or conservative ideology, and the frequency with which they break from the party line. The chart is not meant to establish a moral, social or ethical equivalence between observations at equal distances from zero. That’s not something that can be captured in a chart, and is a judgment made in the hearts and minds of voters.
Why the gap matters. Look at the next chart. The United States was more prosperous when there were more moderate politicians around. Yes, post-war growth declined mostly due to falling birthrates and rising longevity.2 But I’m convinced that the collapse in the political center played a role as well, leading to one-sided policymaking that gets implemented and repealed as the pendulum swings, and issues left unaddressed since the divisions are too wide. I’d like to see a return of the moderates like your father, but I don’t think it will happen anytime soon now that the furies have been unleashed.3 The erosion of political norms and constitutional conventions now taking place, and some of the reaction to it, makes life more difficult for moderates in both parties.4 Hence this note about 2020 and the choice you may face compared to your preferred scenario.5
Whichever party wins in 2020, legislators will eventually have to grapple with issues constraining US growth. Our chairman (Jamie) asked me to work on a project assessing “negative productivity agents”: crumbling transportation and electricity infrastructure, the lack of high speed rail, coastal exposure to storm surges, healthcare costs, sub-par reading and math scores, the world’s highest litigation costs, the economic cost of racial inequality, land use regulation and its adverse impact on labor mobility and housing, the negative impact of arbitrary state licensing, the need for immigration reform, the sad fact that the US leads the developed world in obesity, gun violence, incarceration and opioid use, and the projection from the CBO that by 2030, 100% of Federal tax revenues will be needed to pay entitlements and interest, with nothing left for discretionary spending. You can read the presentation here. The challenges are complex; the chart above suggests that in the past, moderates did a better job of solving them.
Voteview methodology, our chart and further reading on polarization
On the selection of prominent members and supporters for each administration
1 According to Brookings, 44% of House primary candidates identified as Progressive this year (up from 29% in 2016), and the Congressional Progressive Caucus is now the largest Democratic caucus with close to 100 members. In 2018, for the first time in the history of the Gallup poll, more Democrats aged 18-29 had a positive view of socialism than of capitalism.
3 I miss your father. He liked fishing, pie and diners, and disliked parties, small talk and fine restaurants. When your mother threw out his old tweed caps and bought him a new one for Christmas, he told your brother John to throw out the new cap and retrieve the old ones from the trash. He bought a new (brown) car in less than five minutes since he hated shopping. He got sick on vacation but never at work. I apologize in advance but I am gradually becoming him.
4 See “Political Norms, Constitutional Conventions, and President Donald Trump”, Indiana Law Journal, 2017, Siegel (Duke); and “The Trump Presidency and American Democracy: A Historical and Comparative Analysis”, Perspectives on Politics, Oct 2018, Lieberman, Mettler, Pepinsky, Roberts, and Valelly (Johns Hopkins/Cornell/Swarthmore)
Learn more about becoming a J.P. Morgan Private Bank client.
Please tell us about yourself, and our team will contact you.
Purpose of This Material
This material is intended to help you understand the financial consequences of the concepts and strategies discussed here in very general terms. The strategies discussed often involve complex tax and legal issues. Your own attorney and other tax advisors can help you consider whether the ideas illustrated here are appropriate for your individual circumstances. JPMorgan Chase & Co. does not practice law, and does not give tax, accounting or legal advice. We are available to consult with you and your legal and tax advisors as you move forward with your planning.
The information provided may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). The views and strategies described in the material may not be suitable for all investors and are subject to risks. This material is confidential and intended for your personal use. It should not be circulated to or used by any other person, or duplicated for non-personal use, without our permission. Please read this Important Information in its entirety. This information in no way constitutes J.P. Morgan Research and should not be treated as such.
Legal Entity and Regulatory Information
In the United States, Bank deposit accounts and related services, such as checking, savings and bank lending, may be subject to approval are offered by JPMorgan Chase Bank, N.A. Member FDIC.
JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank-managed accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a member of FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMCB, JPMS and CIA are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.
In the United Kingdom, this material is issued by J.P. Morgan International Bank Limited (JPMIB) with the registered office located at 25 Bank Street, Canary Wharf, London E14 5JP, registered in England No. 03838766. JPMIB is authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. In addition, this material may be distributed by JPMorgan Chase Bank, N.A. (“JPMCB”), Paris branch, which is regulated by the French banking authorities Autorité de Contrôle Prudentiel et de Résolution and Autorité des Marchés Financiers or by J.P. Morgan (Suisse) SA, which is regulated in Switzerland by the Swiss Financial Market Supervisory Authority (FINMA).
In Hong Kong, this material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so request. In Singapore, this material is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore. Dealing and advisory services and discretionary investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to you). Banking and custody services are provided to you by JPMIB and/or JPMCB Singapore Branch. The contents of this document have not been reviewed by any regulatory authority in Hong Kong, Singapore or any other jurisdictions. You are advised to exercise caution in relation to this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.
With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. Receipt of this material does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American country, without previous registration of such fund’s securities in compliance with the laws of the corresponding jurisdiction.
Public Offering of any security, including the shares of the Fund, without previous registration at Brazilian Securities and Exchange Commission —CVM is completely prohibited. Some products or services contained in the materials might not be currently provided by the Brazilian and Mexican platforms. All case studies are shown for illustrative purposes only, and are hypothetical.
Any name referenced is fictional, and may not be representative of other individual experiences. Information is not a guarantee of future results.
We believe the information contained in this material to be reliable and have sought to take reasonable care in its preparation; however, we do not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. We do not make any representation or warranty with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/ reference purposes only. The views, opinions, estimates and strategies expressed in it constitute our judgment based on current market conditions and are subject to change without notice. We assume no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward looking statements should not be considered as guarantees or predictions of future events. Investors may get back less than they invested, and past performance is not a reliable indicator of future results.
Risks, Considerations and Additional Information
There may be different or additional factors which are not reflected in this material, but which may impact on a client’s portfolio or investment decision. The information contained in this material is intended as general market commentary and should not be relied upon in isolation for the purpose of making an investment decision. Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document is intended to constitute a representation that any investment strategy or product is suitable for you. You should consider carefully whether any products and strategies discussed are suitable for your needs, and to obtain additional information prior to making an investment decision. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by JPM and/or its officers or employees, irrespective of whether or not such communication was given at your request. JPM and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions. Contact your J.P. Morgan representative for additional information concerning your personal investment goals. You should be aware of the general and specific risks relevant to the matters discussed in the material. You will independently, without any reliance on JPM, make your own judgment and decision with respect to any investment referenced in this material.
J.P. Morgan may hold a position for itself or our other clients which may not be consistent with the information, opinions, estimates, investment strategies or views expressed in this document. JPM or its affiliates may hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as an underwriter, placement agent, advisor or lender to such issuer.
References in this report to “J.P. Morgan” are to JPM, its subsidiaries and affiliates worldwide. “J.P. Morgan Private Bank” is the brand name for the private banking business conducted by JPM.
If you have any questions or no longer wish to receive these communications, please contact your J.P. Morgan representative.
© 2018 JPMorgan Chase & Co. All rights reserved.
INVESTMENT PRODUCTS ARE: • NOT FDIC INSURED • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED
Bank deposit products, such as checking, savings and bank lending and related services are offered by JPMorgan Chase Bank, N.A. Member FDIC. Not a commitment to lend. All extensions of credit are subject to credit approval.