Investment Strategy

Top five trends we’re watching this holiday season

Nov 19, 2021

Although it was a quiet week in the markets, exciting developments are on the horizon.

Our Top Market Takeaways for November 19, 2021.

Market Update

All Too Well

 

All things considered, it was a quiet week in markets. Stocks drifted higher, driven by big tech and the #metaverse (whatever that means). Semiconductor stocks got a boost due to data center strength, secular opportunities in automobiles and increased manufacturing capacity in places such as Malaysia. And while the October retail sales report showed a healthy consumer (even after adjusting for inflation), the most economically sensitive sectors (materials, financials and energy) were the worst performers. Nonetheless, the S&P 500 made its 66th new all-time high of the year on Thursday. It only needs 12 more to break the record of 77 set in 1995.

In the aftermath of last week’s inflation reading, bond yields were relatively tame. Markets continue to think the Federal Reserve will embark on a rate-hiking cycle by the middle of next year, and higher short-term interest rates in the United States seem to be drawing in capital. The U.S. dollar is the strongest it has been relative to a basket of other currencies since last June.

As we head into the holiday season, we want to keep our eye on five developments that matter for markets. This week, we want to give a quick update on them.

[1] Supply chains: The chaos may be peaking.

But really, where’s my stuff? Delivery times are still super long across the globe, largely due to surging demand for goods in the United States. But, maybe, just maybe, we’re starting to see flickers of hope that the supply chain pain is easing. Semiconductor prices (which soared amid demand for all things digital) have turned lower. U.S. auto production (which has been plagued by the semi shortage) rebounded in October. Cargo ship transportation costs have recently declined, big retailers reported better hiring conditions, and backlogs eased. The number of delinquent containers sitting at the Port of Los Angeles is down by almost 30% since the Port instituted a $100 fine per day for every container that sits idle for more than nine days. And companies such as Walmart have said they expect shelves to be fully stocked ahead of holiday shopping sprees. While we’re not out of the woods yet, the latest trend is certainly encouraging.

This chart shows the semiconductor spot price and Cargo Ship Transportation Cost Index from January 2020 to mid-November 2021. In January 2020, the spot price of semis measured $1.8 and started climbing. By March 2020, the price hit a relative high of $2.2 before falling steadily to an all-time low of $1.6. Meanwhile, the Cargo Ship Transportation Cost Index began at 907 and dipped to 411 by February 10, 2020. It maintained a relatively flat level, measuring 393 by March 14, 2020. It spiked at this point to 1,949 on July 7, 2020. It dipped before rising again to 2,044 by October 7, 2020. The semiconductor spot prices rose steadily to $1.76 by January 21, 2021, before spiking to $2.9 on March 21, 2021. Meanwhile, the Cargo Ship Transportation Cost Index hit 1,313 on February 11, 2021, before steadily climbing and reaching 3,183 by May 7, 2021. Around this point, semiconductor spot prices rose to $3.1 on April 21, 2021, dipped, and rose again to $3.2 in July 2021. Meanwhile, the Cargo Ship Transportation Cost Index kept dipped to 2,420 on June 8, 2021, before climbing to 4,132 on August 31, 2021. It dipped at this point, then spiked to 5,650 on October 7, 2021. Meanwhile, semiconductor spot prices fell to $2.8 by September 2021, and dipped further to land at $2.7 by November 2021. A more drastic fall from the Cargo Ship Transportation Cost Index occurred, landing at 2,759 on November 15, 2021.

[2] Energy prices: The risk of a winter surge.

Winter is coming. While energy commodities such natural gas and oil are in short supply, it’s possible that the situation is becoming incrementally less severe. For instance, our Investment Bank believes the crude oil market will have excess supply as soon as the first quarter of next year, and even though the supply response has been moderate, the United States has added nearly 200 active rigs so far this year.

Not to mention that politicians have taken notice (even if they have limited control over oil prices). The United States discussed releasing some Strategic Reserves (which hold over 620 million barrels of crude in the Gulf Coast) to add supply to the market, and China may also release some of its reserves.

Indeed, crude oil and gasoline prices are down around -7.5% from peaks, and U.S. natural gas is down -25%. While it is too early to call the top in energy prices, any softening could go a long way to quell the fears around both a winter energy crisis and inflation.

This chart shows the prices of U.S. natural gas and WTI crude oil from October 1, 2020, to November 17, 2021. The prices are indexed to 100, representing the respective levels on October 1, 2020. From there, WTI crude oil declined a bit before it before it rose to 104.9 while U.S. natural gas inclined to 108.5 by October 9, 2020. Then, WTI crude oil maintained rangebound before it declined to 92.4 by November 1, 2020. Meanwhile, U.S. natural gas kept increasing to a peak of 132.7. Here, WTI crude oil rose to 117.6 while U.S. natural gas dropped to 94.9 by December 8, 2020. From there, both increased to 123.3 for WTI crude oil and 110 for U.S. natural gas by December 22, 2020. Then, WTI crude oil declined to 122.9 by January 4, 2021 while U.S. natural gas declined to 91.2 before it rose back to 106.8 by January 9, 2021. From there, WTI crude oil inclined to 138.4 while U.S. natural gas rose a bit to 108.3 by January 18, 2021. Then, WTI crude oil declined to 134.8 by January 31, 2020. Meanwhile, U.S. natural gas declined to 96.8 and then rose to 114.1 by February 8, 2021. Here, WTI crude oil gradually rose to 156.3 and U.S. natural gas inclined to a peak of 127.4 by February 18, 2021. Then, WTI crude oil rose to a relative peak of 170.7 by March 7, 2021. Meanwhile, U.S. natural gas declined to 98.2 by March 18, 2021. Here, WTI crude oil dropped to 149.2 by March 23, 2021. From there, both gradually rose to 169.1 for WTI crude oil and to 123 for U.S. natural gas by May 17, 2021. Then, WTI crude oil rose to a relative peak of 194.3 by July 13, 2021, while U.S. natural gas inclined to 163.4 by August 6, 2021. Here, WTI crude oil declined to 171.5 before rising to 190.9 and then dropping back to 160.9 by August 22, 2021. Meanwhile, U.S. natural gas declined to 152.4. From there, WTI crude oil rose to 185.9 while U.S. natural gas increased to 216.1 by September 17, 2021. Then, U.S. natural gas spiked to 249.8 by October 5, 2021. Here, U.S. natural gas dipped to 197.4 and then spiked again to 245.4 by October 27, 2021. In the meantime, WTI crude oil kept increasing to a relative peak of 218.6 by October 26, 2021. Then, WTI crude oil declined to 203.5 by November 4, 2021. At the same time, U.S. natural gas declined to 203.5 and then rose to 226.2. Then, WTI crude oil rose to 217.3 before it declined to 203.3 by November 18, 2021. Meanwhile, U.S. natural gas dropped to 189.6 before it rose to 208.4 and then settled down at 203.3.

[3] COVID-19 and reopening: Another setback in Europe.

This month marks two years since the first reported COVID-19 case, and while day-to-day life has certainly improved from the throes of lockdown, it’s still anything but normal. Europe is facing an intensifying wave of new infections, accounting for almost 60% of the world’s new COVID-19 cases. Germany broke another record in new cases yesterday. Some policymakers, such as in the Netherlands, Austria and Belgium, are pursuing partial lockdown measures or restrictions on the unvaccinated. Such trends are worrisome, especially as we head further into winter.

Yet, we continue to believe in the power of vaccines, immunity from prior infection, and new treatments in preventing the worst case outcomes. Fifty-two percent of the world’s population has received at least one vaccine dose, compared to 10% in June. Booster shots in a handful of countries are underway. And breakthrough treatments, such as Pfizer’s take-home pill, are already making waves. COVID-19 remains a concern, but the future looks brighter.

This chart shows the seven-day moving average of new COVID-19 cases per million in the United Kingdom, the European Union (EU) and the United States from March 2020 to mid-November 2021. Beginning at 0, all countries began to climb, with the United Kingdom rising to 72.9 on March 27, 2020, the EU rising to 65.3 on April 12, 2020, and the United States rising to 94.5 on April 6, 2020. From there, all three areas’ cases fell. On June 9, 2020, the U.S. moving average marked 64.3 before climbing to 198.2 on July 17, 2020. Meanwhile, the United Kingdom and the EU kept falling, marking 13.6 and 9.7, respectively, on July 17, 2020. From here, the U.S. cases dipped to 103.3 on September 6, 2020, while cases in the United Kingdom and the EU rose to relative peaks of 365.6 on November 17, 2020, and 489.1 on November 2, 2020, respectively. U.S. cases climbed as well, to 534.1 on November 18, 2020, then dipped before climbing again to 660.3 on December 13, 2020, then dipped, before finally climbing to an all-time high of 751.7 on January 6, 2021. Meanwhile, the United Kingdom and the EU dipped to 212 on November 29, 2020, and 269.9 on December 2, 2020, respectively. Then, they diverged. The United Kingdom skyrocketed to an all-time high of 876.9 on January 4, 2021, before dramatically falling to a relative low of 22.6 on April 5, 2021. Meanwhile, the EU remained relatively steady, marking 240.9 on December 23, 2020, 342.1 on January 7, 2020, and 221.8 on February 25, 2021. After the United States had its all-time high, it dramatically fell, hitting a relative low of 37.2 on June 21, 2021. The EU experienced a relative low of 26.1 on June 26, 2021, before beginning to rise. Meanwhile, the United Kingdom skyrocketed again to 699.7 on July 15, 2021, dipped to 380.2 on July 27, 2021, before rising again to 690.8 on October 16, 2021. Most recently, it dipped before rising again to land at 571.2 on November 11, 2021. In the EU, cases rose to 152.3 on July 28, 2021, dipped, then rose again to mark 421.4 on November 11, 2021. Meanwhile, the United States experienced a relative peak of 514 on September 7, 2021, before falling to 213.2 on October 20, 2021. Most recently, cases in the United States rose to 261.2 on November 11, 2021.

[4] Political negotiations: Washington will be busy through the holidays.

In Washington, lawmakers are still hammering out the final details of President Biden’s Build Back Better plan (which targets “social” infrastructure on top of the already passed physical infrastructure plan), discussing the impending debt limit (which could breach on December 15), and deciding who the next Fed Chair will be (current Chair Jerome Powell is the favorite, but if the last two years have taught us anything, it’s to not be surprised by the unexpected). We think the Build Back Better agenda (at least in some form) is likely to be passed before the new year. Given that the spending is almost fully offset by revenue raised, the headline economic impact could be modest. However, some sectors may be supported, and high-income families are likely to see higher taxes, which emphasizes the importance of being mindful around structuring one’s assets.

Meanwhile, President Biden met with Chinese President Xi to discuss, among other things, the (somehow still ongoing) trade war, increasing oil supplies and the Olympics. While we aren’t counting on the tariffs on Chinese imports getting rolled back, it could be an interesting option to improve supply chains and help deal with inflation.

[5] Some assets have lost their magic in 2021.

Peloton is down over -70% as people choose to work out at the gym and not at home. Penn National Gaming, which surged over +450% in 2020, is down over -60% from peak after being left out of New York State’s online sports gaming program. Zoom, the online meeting provider, is down -25% this year as office occupancy continues to tick up. The ARK Innovation ETF, one of the darlings of 2020 and early 2021, is now down almost -30% from highs. Same thing with the SPAC Index.

Safe assets haven’t found any magic this year, either. Long-term bonds are down over -5%. Gold has lost over -2.5% this year and is -10% down from the 2020 highs. The worst-performing equity sectors in the United States are utilities and consumer staples. Earlier this year, we thought it would be best to overweight risky assets relative to “safer” ones, and so far this year that view has proved to be correct.

One area to keep an eye on is clean energy. Broadly, the sector is still down -25% from highs, but it did rally around +20% in the weeks leading up to and during the COP26 conference. It may be set to regain some magic in 2022.

Feeling some angst?

With more record highs in 2021 than there have been weeks in the year, some investors may be questioning when the ball might drop. We continue to believe we are entering a vibrant mid-cycle environment (despite the risks), but we don’t discount the possibility of volatility rearing its head. Importantly, volatility is a mainstay of investing—and the average year since 1980 has seen an S&P 500 drawdown just north of 14%. But even so, the index has ended up on the year over 75% of the time. If history is any indicator, it’s taught us that staying invested tends to benefit over the long term.

This chart shows the S&P 500 calendar year returns and maximum intra-year drawdowns from 1980 to 2021. In 1980, the full-year return was 26% and the maximum intra-year drawdown was -17%. In 1981, -10% and -18%, respectively. In 1982, 15% and -17%. In 1983, 17% and -7%. In 1984, 1% and -13%. In 1985, 26% and -8%. In 1986, 15% and -9%. In 1987, 2% and -34%. In 1988, 12% and -8%. In 1989, 27% and -8%. In 1990, -7% and -20%. In 1991, 26% and -6%. In 1992, 4% and -6%. In 1993, 7% and -5%. In 1994, -2% and -9%. In 1995, 3% and -3%. In 1996, 20% and -8%. In 1997, 31% and -11%. In 1998, 27% and -19%. In 1999, 20% and -12%. In 2000, -10% and -17%. In 2001, -13% and -30%. In 2002, -23% and -34. In 2003, 26% and -14%. In 2004, 9% and -8%. In 2005, 3% and -7%. In 2006, 14% and -8%. In 2007, 4% and -10%. In 2008, -38% and -49%, all-time lows. In 2009, 23% and -28%. In 2010, 13% and -16%. In 2011, 0% and -19%. In 2012, 13% and -10%. In 2013, 30% and -6%. In 2014, 11% and -7%. In 2015, -1% and -12%. In 2016, 10% and -11%. In 2017, 19% and -3%. In 2018, -6% and -20%. In 2019, 29% and -7%. In 2020, 16% and -34%. Finally, in 2021, 25% and -5%.

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JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under U.S. laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.

This material has not been prepared specifically for Australian investors. It:

  • May contain references to dollar amounts which are not Australian dollars;
  • May contain financial information which is not prepared in accordance with Australian law or practices; 
  • May not address risks associated with investment in foreign currency denominated investments; and
  • Does not address Australian tax issues.

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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. Please read the Legal Disclaimer in conjunction with these pages.

INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • 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

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