Investment Strategy
1 minute read
This week marked the end of an eventful third quarter. As we look to the months ahead, we thought it apt to check in on where we stand:
The fourth quarter got off to a rocky start this week due to escalating geopolitical risks in the Middle East and key macroeconomic data releases. While the strike at East Coast ports added additional uncertainty, based on Thursday night reports it seems as if the longshoremen have agreed in principle to a deal that would alleviate the potential economic pressure associated with a prolonged strike.
Through market close on Thursday, the S&P 500 was down -1% during the week and Treasuries climbed, with the 2-year Treasury up 15 basis points (bps) to 3.71% and the 10-year Treasury up 9 bps to 3.85%.
Elsewhere, “safe-haven” assets linked closely to increased global tensions made moves. Gold rallied slightly +0.9% and oil spiked +8.5%. Investors also received the latest employment data. The bottom line? The labor market appears to be holding steady. Layoffs are lower than at any point before the pandemic, and workers are quitting their jobs at the slowest pace since 2015.
As we move further into the final quarter of 2024, we want to first give you the need-to-knows on the key global developments from this week and what they may mean for your portfolio.
Conflict in the Middle East. Our job as investors is to assess what impact the conflict might have on the global economy and financial markets, and then determine if we need to change the advice we are giving about portfolios. But first, here are the facts as we understand them.
On Tuesday, Iran launched an airborne attack on Israel. The retaliation comes after a massive air strike in Beirut resulted in the death of Hassan Nasrallah, Hezbollah’s leader.
According to the Israeli Defense Forces, many of the missiles had been intercepted, but several made landfall in the south and central parts of the country. This escalation is a significant development in the ongoing conflict that began in October 2023. While the war has remained somewhat contained, increased involvement from Iran has left global leaders concerned about the prospects of a wider war.
While U.N. and G7 leaders have called for proportional responses to avoid further escalation, Israeli authorities are preparing for a “significant retaliation” against Iran for its missile attack, with potential targets including Iran’s oil production facilities and nuclear sites. In the meantime, the Israeli military launched another air strike on Beirut, and troops continue to engage in close-range combat with Hezbollah across Southern Lebanon.
Israeli officials are consulting with the Biden administration, anticipating the need for U.S. defensive cooperation should Iran retaliate further. So far, President Biden has urged restraint, specifically against targeting Iran’s nuclear sites.
Today, our investment approach recognizes the world’s inherent uncertainties and fragilities. Our investment view is not predicated on declining global conflict.
In all, the market seems very much aware of the conflict in the Middle East. Asset classes that are most sensitive to geopolitical risk have moved in a way that is consistent with our expectations. Oil has spiked by about 8.5% so far this week, while gold has remained near all-time highs.
When it comes to oil, excess supply (the United States is producing about 13.4 million barrels per day alone, while OPEC+ is still set to start raising output by January after months of production cuts) along with subdued demand should help keep the price gains contained. All of this is subject to change if we do see material escalation, but our understanding of how broader markets have behaved around similar geopolitical events suggests that the economic backdrop and business cycle are the key dynamics to watch (see our thoughts here).
What should investors consider? When there’s uncertainty, the best thing to do is remember that staying invested in a diversified, goals-aligned portfolio has paid off through countless geopolitical crises, wars, pandemics, supply chain interruptions, labor strikes and recessions—and will likely continue to do so.
That said, there are some tactical decisions that investors may want to consider to further insulate their portfolios. This could include taking a look at investments with uncorrelated return streams, lower volatility or downside buffer capabilities (e.g., structured notes).
For example, the utilities sector has been historically less volatile relative to the broader S&P 500. To boot, we think it is well positioned today thanks to the AI-fueled modernization and expansion of the power grid. Additionally, as interest rates decline, utility stocks’ dividend yields (~3%) may become even more appealing. Despite their strong 2024 performance (+27% year-to-date), utilities are trading at a discount to the S&P 500, and are roughly in line with their historical valuation averages, further enhancing their attractiveness.
We are also believers in the long-term performance of companies in the security space (from traditional defense to cybersecurity), and today is no different. When it comes to commodities, gold may trend higher if uncertainty remains, and while we believe supply dynamics should balance oil price action, further escalation could push prices higher.
We will continue to monitor possible drivers of volatility across the spectrum. That said, we remind investors that over the last eight decades, the fourth quarter has been the best for the S&P, with an average gain of 4.2% and gains 79% of the time.
Your J.P. Morgan team is here to help you navigate what may be on the road ahead.
All market and economic data as of October 2024 and sourced from Bloomberg Finance L.P. 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.
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