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Investment Strategy

Is the coast clear? Investing amid the rally

Nov 17, 2023

As we gear up for the final weeks of the year, we think the key is to stay focused. Even with the rally, we see opportunity ahead.

November is on track to be best month of 2023. The too-hot economy is finally showing signs of cooling, and seems to be taking the edge off for investors. So far this month, the S&P 500 is up a meaningful 7.5%, bringing its year-to-date rally in touching distance of 20%. That rally has come as the yield surge loses steam. Heading into Friday, 10-year Treasury yields have now dropped almost a staggering 60 basis points from their intraday highs less than a month ago, and U.S. core bonds have now totally erased all of their 2023 losses.

So, is the coast clear?

It’s probably too soon to say, but there are a number of promising signs.

Here are 3 things this week that offered more confirmation.

1. The economy is cooling but not too much.

All the reads this week seemed to strike the balance of a soft landing. The U.S. consumer spent at a slower pace in October than it did over the summer, but still showed strong demand for all things e-commerce and electronics, restaurants and grocery stores, and health and personal care products. Earnings from retail giants like Target and Walmart echoed that cooling demand, but still managed to post beats. Also to that end, more Americans filed claims for unemployment in a sign that the super tight labor market is easing. Meanwhile, pockets of the economy that have been worse for wear over the last year, like manufacturing, showed signs of stabilizing.

2. Inflation is still coming down.

This week’s read on the all-important Consumer Price Index (CPI) showed U.S. inflation cooled in October more than expected – across all measures. Headline prices didn’t increase at all over the month (+0.0% m/m), while core CPI (stripping out volatile food and energy prices) slowed its roll (+0.2% m/m). That brought the year-over-year figures to +3.2% for headline and +4.0% for core (a two-year low!).

Under the hood, signs were even more promising. Fed Chair Powell’s “super core” measure, which looks at sticky services prices most tied to the labor market, showed a big improvement (with its biggest monthly deceleration in a year). Elsewhere, goods deflation kept going (especially for used autos), and prices at the pump weren’t as painful (thanks to the latest decline in oil prices). Shelter prices, on the other hand, were still frustratingly stubborn, but the trend in lower rent prices for new leases continues signal a cooldown will come.

Inflation is cooling, but there’s still some work to do

Sources: Bureau of Labor Statistics, Haver Analytics. Data as of October 31, 2023.
This chart shows the contribution to year-over-year U.S. headline inflation since January 2022. In January, 2022 headline inflation was 7.48%, Core goods contributed 2.36%, core services ex-shelter contributed 0.98%, shelter contributed 1.45%, food contributed 0.98%, and energy contributed 1.71%. In February, 2022 headline inflation was 7.87%, Core goods contributed 2.48%, core services ex-shelter contributed 1.03%, shelter contributed 1.57%, food contributed 1.11%, and energy contributed 1.68%. In March, 2022 headline inflation was 8.54%, Core goods contributed 2.36%, core services ex-shelter contributed 1.11%, shelter contributed 1.65%, food contributed 1.23%, and energy contributed 2.21%. In April, 2022 headline inflation was 8.26%, Core goods contributed 1.98%, core services ex-shelter contributed 1.21%, shelter contributed 1.69%, food contributed 1.31%, and energy contributed 2.10%. In May, 2022 headline inflation was 8.58%, Core goods contributed 1.74%, core services ex-shelter contributed 1.24%, shelter contributed 1.78%, food contributed 1.41%, and energy contributed 2.45%. In June, 2022 headline inflation was 9.06%, Core goods contributed 1.48%, core services ex-shelter contributed 1.37%, shelter contributed 1.83%, food contributed 1.45%, and energy contributed 2.98%. In July, 2022 headline inflation was 8.52%, Core goods contributed 1.44%, core services ex-shelter contributed 1.37%, shelter contributed 1.85%, food contributed 1.52%, and energy contributed 2.39%. In August, 2022 headline inflation was 8.26%, Core goods contributed 1.46%, core services ex-shelter contributed 1.49%, shelter contributed 2.03%, food contributed 1.58%, and energy contributed 1.74%. In September, 2022 headline inflation was 8.20%, Core goods contributed 1.37%, core services ex-shelter contributed 1.71%, shelter contributed 2.15%, food contributed 1.57%, and energy contributed 1.45%. In October, 2022 headline inflation was 7.75%, Core goods contributed 1.05%, core services ex-shelter contributed 1.65%, shelter contributed 2.24%, food contributed 1.53%, and energy contributed 1.32%. In November, 2022 headline inflation was 7.11%, Core goods contributed 0.76%, core services ex-shelter contributed 1.63%, shelter contributed 2.31%, food contributed 1.49%, and energy contributed 0.99%. In December, 2022 headline inflation was 6.45%, Core goods contributed 0.47%, core services ex-shelter contributed 1.59%, shelter contributed 2.47%, food contributed 1.39%, and energy contributed 0.54%. In January, 2023 headline inflation was 6.41%, Core goods contributed 0.31%, core services ex-shelter contributed 1.52%, shelter contributed 2.58%, food contributed 1.36%, and energy contributed 0.64%. In February, 2023 headline inflation was 6.04%, Core goods contributed 0.22%, core services ex-shelter contributed 1.51%, shelter contributed 2.65%, food contributed 1.27%, and energy contributed 0.39%. In March, 2023 headline inflation was 4.98%, Core goods contributed 0.33%, core services ex-shelter contributed 1.40%, shelter contributed 2.65%, food contributed 1.14%, and energy contributed -0.53%. In April, 2023 headline inflation was 4.93%, Core goods contributed 0.43%, core services ex-shelter contributed 1.26%, shelter contributed 2.63%, food contributed 1.03%, and energy contributed -0.42%. In May, 2023 headline inflation was 4.05%, Core goods contributed 0.43%, core services ex-shelter contributed 1.12%, shelter contributed 2.60%, food contributed 0.90%, and energy contributed -1.01%. In June, 2023 headline inflation was 2.97%, Core goods contributed 0.28%, core services ex-shelter contributed 0.95%, shelter contributed 2.51%, food contributed 0.77%, and energy contributed -1.54%. In July, 2023 headline inflation was 3.18%, Core goods contributed 0.16%, core services ex-shelter contributed 0.98%, shelter contributed 2.48%, food contributed 0.66%, and energy contributed -1.10%. In August, 2023 headline inflation was 3.67%, Core goods contributed 0.05%, core services ex-shelter contributed 0.99%, shelter contributed 2.36%, food contributed 0.58%, and energy contributed -0.30%. In September, 2023 headline inflation was 3.70%, Core goods contributed 0.00%, core services ex-shelter contributed 0.92%, shelter contributed 2.33%, food contributed 0.51%, and energy contributed -0.04%. In October, 2023 headline inflation was 3.24%, Core goods contributed 0.02%, core services ex-shelter contributed 0.94%, shelter contributed 2.20%, food contributed 0.45%, and energy contributed -0.37%.

3. Fed rate hikes look finished.

With this week’s data in hand, investors priced out all chances of further Fed rate hikes. Odds for a January hike fell to virtually 0% from 30% at the start of the week. Is it mission accomplished? No, there’s still more progress to be made (core inflation at 4% is still double the Fed’s target), but it’s notable that things really seem to be moving along in right direction.

But we acknowledge there’s been a big rally. Have you missed it?

As we gear up for the final weeks of the year, we think the key is to stay focused and keep an eye on the big picture:

  • Investing at highs hasn’t necessarily been a bad thing.

Stocks have rallied over 25% from their October 2022 lows. Now, there is some fear getting invested near the top of the market, even as we see a constructive backdrop ahead (as we noted the other week).

But, history shows that after gains like these, forward-looking returns for both the short and long-term investor have still been strong. Going back to 1980, after we’ve seen at least a 20% rally from the lows, stocks were higher about 16% on average a year later and positive 82% of the time. That rises to 100% of the time three years out, all while clipping about a 12% annualized return.

That’s to say, sitting on the sidelines as markets march higher can have big consequences, and means getting back in at even higher valuations.

Even after +20% rallies, forward returns have looked compelling

Sources: Bloomberg Finance L.P., J.P. Morgan Wealth Management. Data as of November 16, 2023. 20% rally refers to the date at which the S&P 500 first reaches a level 20% above the associated 52-week low point. Past performance is no guarantee of future results.
This chart shows the S&P 500 index and its intra-year highs since 1980. The chart also has a table which shows the median return and % of times returns were positive following an intra-year high over a one-, three-, and five-year period. The median 1-year return following an intra year high was 2.9% and it was positive 53.5% of the time. The median 3-year return following an intra year high was 8.4% annualized and it was positive 77.5% of the time. The median 5-year return following an intra year high was 8.7% annualized and it was positive 74.4% of the time. The S&P starts at 112 in February 1980 . It rises to 1,527 in March 2000. It falls to 676 in March 2009. It rises to 3,337 in February 2020. On November 14 the S&P closed at 4,495.
  • Don’t try to time it. 

We took a look at how missing the best days so far this year would have impacted returns. If you had invested in U.S. stocks and stayed fully invested, you’d be looking at a +19% return – well above the average +14% for calendar years over the last four decades. But, if you missed just the 5 best days out of the 221 trading days so far, your return would be cut to 8%. Miss the best 10? Your return would be negative.

But how likely would it have been to miss the best days? The problem is that the best days tend to cluster around the worst days, when investors feel the most fearful and tempted to hit “sell.” In 2023, 8 of the 10 best days have occurred within two weeks of the 10 worst days.  

It’s about time in the market, not timing the market.

Missing the best days can dramatically undermine returns

Source: Bloomberg Finance L.P., J.P. Morgan Wealth Management. Analysis inspired J.P. Morgan Asset Management’s Guide to Retirement. Past performance is no guarantee of future results.
This graph shows the S&P 500 returns during 2023 and the impact of missing the best days. If you were fully invested in 2023 up until November 16 your return would be 19%. If you missed 5 of the best days your return would be 8%. If you missed 10 of the best days your return would be -1%. If you missed 20 of the best days your return would be -14%. If you missed 30 of the best days your return would be -23%.
  • Bonds are still at a historically attractive entry point.

With the big decline in yields over the last few weeks, we mentioned that U.S. core bonds have now erased all of their 2023 losses. But, yields are still hovering around their most elevated levels in the last decade, and even with the latest rally, the Bloomberg U.S. Aggregate Bond Index is still down about 15% from its all-time highs. In other words, this is still the biggest dip in core bonds that investors have had the opportunity to buy over the last 40+ years.

But while we believe bonds stand to offer better potential for income and diversification this cycle than the last one (which was defined by an era of ultra-low rates), yields may not stay as high as they are today forever. We know from the past that when the Fed finishes hiking, rates tend to fall pretty quickly. The last few weeks is case in point.

Core bonds are still in their worst drawdown in 40 years

Source: Bloomberg Finance L.P. Data as of November 16, 2023. Past performance is no guarantee of future results.
The chart describes the % change of Bloomberg U.S. Aggregate Index from prior all-time high. The first data point came in at -3% in February 1980, it has then fluctuated near that level until it dropped to a low point at -18% in October 2022. Then it bounced back to -12% in March 2023, before rising to -11% in May 2023, and finishing at -14% in November 2023.

In all, we believe it’s a good time to be a multi-asset investor. With the final weeks of the year upon us, now is a good time to reflect: What is the purpose of your wealth? Does your portfolio reflect that? The things we want to do with money – our goals – are at the root of why we invest in the first place.

Your J.P. Morgan team is here to ensure your portfolio achieves the intent of your wealth.

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Bonds are subject to interest rate risk, credit and default risk of the issuer. Bond prices generally fall when interest rates rise.​

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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To learn more about J.P. Morgan’s investment business, including our accounts, products and services, as well as our relationship with you, please review our J.P. Morgan Securities LLC Form CRS and Guide to Investment Services and Brokerage Products

 

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. Insurance products 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

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.