A look back at the Top Market Takeaways that hit and missed the mark, and what we think is to come.
Our Top Market Takeaways for September 18, 2020.
A special edition
Our report card
This week is a special one. It’s our two-year anniversary of Top Market Takeaways! To commemorate this time sharing our insights with you, we’re taking a look back at examples of what we got wrong, doing a little victory dance for what we got right, and giving our best Marty McFly impression for three things we’re expecting for the future.
First, a few things we got wrong:
- Expecting no recession in 2020. Heading into 2020, coordinated global monetary easing and the watershed “phase one” U.S.-China trade deal had breathed new life into the economic cycle. There were no obvious market or economic imbalances on the precipice of unwinding. We thought the runway was relatively clear (save for a few wildcards, like geopolitics and the 2020 U.S. election) for the economic expansion to continue well into its 11th year. 2020 had other plans. The COVID-19 crisis brought an exogenous (outside) shock to the economic system. It not only became the recession that no one predicted, but also the recession that was no one’s fault.
- The degree of devastation and far-reaching impact of COVID-19. When news of COVID-19 first hit headlines in January as a rapidly spreading virus in China, we wrote that we thought the situation had a low likelihood of lasting impact. We even said that it would be unlikely for other countries’ containment responses to be as stringent as China’s…needless to say, we were very wrong. Eight months later, the world has seen over 30 million cases (and climbing), dramatic lockdowns across developed and emerging economies alike, and the deepest recession (across a variety of metrics) since the Great Depression.
- Not believing in the equity rally, at first. For a while, we couldn’t quite wrap our heads around what the equity market was signaling—at the end of March, economic data was still really bad and corporate earnings prospects were uncertain at best, dire at worst. The mistake here was not recognizing earlier that equity valuations may have just been entering a “new normal,” given lower for longer interest rates globally. Come the end of April, we started to tune into the wide dispersion between companies within the index—dissecting the “market of stocks” rather than just considering the “stock market” as one unit. There have been very clear winners and losers throughout the crisis, and the largest companies in the U.S. stock market (many of which are tech or tech-adjacent) were extremely resilient.
But, hey! Here’s what we got right:
- Believing in secular growth. Since 2018, we’ve been talking about digital transformation, healthcare innovation and sustainability as areas that stand to outpace the broader growth of the economy. We emphasized this view further in our 2020 outlook. The proof is in the pudding: Just look at market performance. Clean Energy, Technology and Healthcare have all outperformed year-to-date.
- Calling the market bottom. We got this one mostly right. On March 23, we wrote that we were looking for three conditions that would tell us that the market bottom was in (and as chance would have it, that day actually happened to be the market bottom):
- The number of daily new COVID-19 infections needed to decline.
- The Fed needed to help fix the problems in fixed income and money markets, keeping the flow of credit to the real economy open.
- Fiscal stimulus around the world needed to be large and well designed enough to cushion the economic fallout.
The gift of hindsight tells us 2 and 3 were spot on. While point 1 didn’t quite meet the bar (it’s still not totally clear that daily new global cases have peaked), we would note that new cases in Italy (which saw one of the worst outbreaks) did peak right as the market bottomed. We didn’t call the bottom or wave an “all clear” signal for risk assets, but we did recognize something had changed as stimulus flooded into the economic and financial system. In fact, we continued to advocate for companies exposed to secular growth trends, as well as traditional diversifiers such as gold. We even took some steps to add risk back to our multi-asset class portfolios in March, specifically through allocating to high yield bonds. Which brings us to our next point…
- Advocating for high yield and choosing core bonds over cash. While we may have been a little late to believe in the equity rally, we started advocating for high yield back in March, while markets were finding their bottom. With high yield and investment grade spreads at their widest levels since the Global Financial Crisis, we thought valuations looked more compelling. Plus, central banks seemed likely to provide an important backstop. Indeed, U.S. high yield bonds have returned +27% from their lows. At the same time, despite historic uncertainty and volatility, we also advised against retreating to the safety of cash. Along those lines, you would have missed out on a remarkable rebound in risk assets if you’d done so.
- Calling for a faster recovery than the Global Financial Crisis and Great Depression. While we were looking at some of the worst economic prints on record, we were calling for the recovery to be one of the fastest on record. The COVID-19 crisis is an example of a supply-driven recession (where the supply of goods and services was restricted, think: lockdowns) rather than a demand recession (where higher interest rates and overleverage result in lower spending and investment). In the past, supply-driven recessions have seen faster recoveries than demand-driven recessions—and that’s just what we’re seeing this time around.
Finally, where are we going from here? Overall, we’re optimistic. We think the backdrop is pretty supportive for investors, particularly over the medium term. Here are a few examples of what we expect for the future:
- Megatrends are here to stay, and they’re accelerating. In our view, megatrends such as digital transformation, healthcare innovation and sustainability will continue to offer investors above-market levels of growth and potential returns. Consider that:
- This year, we’ve seen more consumption, more work and more social activity pushed to the digital sphere. Cloud software company Domo, Inc. estimates that every minute, consumers spend an estimated $1,000,000 online, Zoom hosts roughly 208,000 participants in meetings, TikTok is installed over 2,700 times, WhatsApp users share over 41 million messages, Netflix users stream over 400,000 hours of video, and so on. And still, only 59% of the global population are active internet users!
- In 2019—the halcyon days before the COVID pandemic—only 11% of all U.S. consumers had used virtual medical services (aka, telehealth). By May of this year, that portion grew to 46%, as patients sought virtual primary care visits with doctors during lockdown periods. Some recent estimates suggest that about a quarter of healthcare office visits and outpatient care could be delivered virtually, signaling huge potential for more efficient and cost-effective medical services in the future.
- Green energy generation costs have converged with (and in some cases, dropped below!) the cost of fossil fuels, and governments around the world are prioritizing the adoption of energy sources that are clean, economical, renewable and locally sourced. With this in mind, we think the earnings of global clean energy companies could exceed those of major benchmarks such as the S&P 500 over the next two years.
- Higher stock valuations are the new normal. As we discussed last week, there’s no denying that equities currently look expensive relative to their own history. But again, today’s investment environment is one defined by relatively slower economic growth and much lower interest rates. We expect that investors will be willing (or in some cases, forced) to pay up for future earnings growth for some time yet. The rules for what constitute “normal” valuations are being rewritten.
- Investors will have to expand their toolkits to find yield. Global central banks are reiterating their intentions to keep policy interest rates at historically low (read: zero or negative) levels to support economic recovery. That makes it clear that cash-like instruments and traditional safe-haven bonds won’t offer investors the same degree of real capital preservation and income generation as they have historically. Tradeoffs may be necessary to find yield once afforded by core bonds: giving up liquidity to generate income from real estate investments, or taking a little more risk by moving into the upper-tier portion of high yield bonds or preferred securities, for example.
Here’s to another year of Top Market Takeaways ahead. Thank you for joining us on this journey; we’re grateful.
All market and economic data as of September 2020 and sourced from Bloomberg and FactSet unless otherwise stated.
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.
Any company names are for illustrative purposes only and do not constitute a recommendation.
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- 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.