Senator Bernie Sanders has looked strong in Iowa and New Hampshire, but markets don’t seem to care.


Our Top Market Takeaways for the week ending February 14, 2020.

Markets in a minute

Roses are red…

…Violets are blue, the stock market’s up, happy Valentine’s Day to you. Global equities wavered on Thursday as China announced thousands of newly confirmed coronavirus cases in Hubei Province. The spike in infected patients was attributable to a change in diagnostic standards—patients who exhibit all symptoms of the virus (fever, cough, shortness of breath) are now being reported as “clinically confirmed” cases, even if they haven’t been tested. For more of our thoughts on the broader investment implications of coronavirus, see the latest piece by Alex Wolf here.

Stocks pushed through the jitters, however, and managed not to break our hearts. China’s CSI 300 finished the week +2.3% higher, and the S&P 500 (+1.4%) and Stoxx Europe 600 (+1.6%) were both up on the week heading into Friday. Treasury yields were modestly lower across the curve.

Our valentine to you is a roundup of some investment and economic facts and figures (What did you expect, candy hearts and a sappy mixtape?!):


  • Stocks keep making new highs…but globally, they aren’t as high as you might think. Only 14 of the 49 countries in the MSCI All-Country World Index made new post-crisis highs over the last 12 months: Hong Kong, Hungary, Taiwan, Ireland, United States, Sweden, the Netherlands, India, France, Canada, Switzerland, New Zealand, Denmark and Australia.
  • The big stocks matter. Apple, Microsoft, Amazon, JPMorgan Chase and Visa have contributed roughly 31% to the overall change of the S&P’s market cap over the last year, about as much as the next 30 contributors combined. The five largest companies by market cap (Apple, Microsoft, Amazon, Alphabet and Facebook) make up a little less than 20% of the index, the highest percentage for the top five companies since 2000 (when it was Microsoft, Cisco, General Electric, Intel and ExxonMobil). For further thoughts on this, see Michael Cembalest’s latest Eye on the Market.
  • Yields are low…really low. The J.P. Morgan Global Broad Bond Index tracks the sovereign debt of 27 countries. Twenty of them had yields that hit all-time lows in the last year. Singapore and Israel hit lows in late January 2020 in the wake of the coronavirus. Hungary, Spain, Portugal, the Netherlands, Ireland, Belgium, Sweden, Poland, Korea, Germany, France, Finland, Denmark, Austria, the United Kingdom and Italy hit lows last summer, while the Antipodes (a fancy way to say Australia and New Zealand) hit lows in October 2019. This week, the yield on the J.P. Morgan JULI Index Yield, which tracks the U.S. corporate bond market, hit all-time lows.
  • Cities are going green (like Kashyyyk). Nineteen cities globally have committed to achieving net-zero carbon emissions in new buildings by 2030, and for all buildings by 2050. These cities represent 130 million people and $622 billion in real estate value, which is over a third of the value of MSCI’s Global Property Index.
  • ESG bonds are a-comin’. Over $70 billion worth of bonds were issued in 2019 that have ESG (environmental, social and governance)-linked loan terms (meaning that the interest rates increase if the borrower’s ESG rating changes or carbon emissions don’t decrease by a certain threshold, for example). This doubled the rate of ESG-linked bonds issued in 2018. If the trend continues, companies’ cost of capital will be increasingly linked with ESG standards.
  • Don’t Doubt ur Vibe.” Tesla is the second best-performing stock in the MSCI World Index over the last year, up +160% (only Shopify has rallied more). The worst? Aurora Cannabis, which is down -80%.  
  • OK boomer. Millennials are effectively tied with baby boomers as the largest cohort of eligible U.S. voters, but only 50% of millennials actually voted in 2016 versus 70% of boomers. If young people turn up at the polls throughout the Democratic primaries, it could bode well for Bernie Sanders—entrance polls conducted at the Iowa caucuses showed that almost half of surveyed individuals under 30 supported the senator from Vermont. Which begs the question.

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Why aren’t markets feeling the Bern?

Senator Bernie Sanders has looked strong in Iowa and New Hampshire, but markets don’t seem to care. This seems confusing, especially given the anxiety that investors were feeling in October. Quick flashback: Another progressive, Senator Elizabeth Warren, was surging in the polls at the time. The S&P 500 was 5% below previous highs. Sectors that are particularly exposed to the progressive agenda (like managed healthcare) were significantly underperforming the broad market. On October 4, when Senator Warren’s betting market odds peaked at 50%, the S&P 500 traded at a 16.4x forward price-to-earnings ratio.

Today, betting markets suggest that Senator Sanders has a 44% chance of becoming the Democratic nominee, but the S&P 500 trades at a ~19x forward price-to-earnings ratio, the managed healthcare sector has caught back up to the market, and the S&P 500 is a split-hair away from all-time highs.

What gives? Why have markets been able to shrug off the progressive surge of Sanders, but were so fixated on Warren?

Well, we don’t know for sure (and many other market drivers have been in play), but we do have an idea. First, betting markets imply that there is an equal likelihood between a candidate from the “progressive bloc” of Elizabeth Warren and Bernie Sanders winning the Democratic nomination and someone from the more “moderate bloc” (Buttigieg, Biden, Bloomberg, Klobuchar). This is a lower likelihood of a progressive candidate than there was in October. Then, betting markets gave the progressive bloc an almost 60% chance at the nomination versus 40% for everyone else.

Second, and perhaps more importantly, betting markets have been more positive on President Trump’s re-election campaign. In October, Democrats were favored over President Trump (or another Republican) to win the White House. Now, Democrats are slight underdogs. This shift has almost fully offset Senator Sanders’s rise. In the chart below, we use the betting market probabilities to show the odds of a progressive winning the White House in November. In case you didn’t think that markets care, we also show the relative performance of the managed healthcare companies (those who would be most at risk from policies like Medicare for All) relative to the broad market. Their relative performance has been in lockstep with the market’s perception of a progressive president: underperforming when their relative odds are rising, and outperforming when their odds are falling.

The line chart shows the managed care sector’s performance relative to the S&P 500 and the perceived odds of a progressive Democratic president. It shows the two are correlated from June 2019 through February 11, 2019.
Our base case remains that both the Democratic candidacy and the general election are very much up for grabs, but this case study provides an example of the real impacts that policy (or perceived likelihood of policy) can have on markets. The road to November may bring volatility and shifts to market dynamics. Be that as it may, we don’t think it will be enough to derail a long-term, disciplined investment plan that’s aligned to your goals.


All market and economic data as of February 2020 and sourced from Bloomberg, FactSet and Gavekal 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.


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