Economy & Markets
1 minute read
This week’s macro data pushed large-cap equities to their best performance streak in over a month.
The S&P 500 is up +3.7% so far this week, which if it holds would be the best weekly performance since November. It’s been a broad rally this week. Small caps (Solactive 2000, +2.7%) are up, and mega caps (“Magnificent 7,” +6.1%) have outperformed.
Performance was driven by a weeklong run of favorable data across producer prices, consumer prices, retail sales and jobless claims. This has helped quell market slowdown fears sparked by the July Jobs Report. Prices were in line with or lower than Street expectations, initial claims (those applying for unemployment insurance) were lower, and the control measure of retail sales (what is used in the GDP calculation) tripled market forecasts.
Stronger data pushed yields higher on the short end of the curve this week. The 2-year is up by 4 basis points (bps) on the week, while further out on the curve, the 10-year is lower by 3 bps.
In micro news, Walmart (+7.7%), the largest private employer in the United States, reported second-quarter earnings. The retailer raised its sales growth guidance for the year 4.75% (versus expectations of 4%). Management also gave an upbeat description of the consumer as: “Each part of the business is growing—store and club sales are up, and eCommerce is compounding.” Shares of Starbucks (+26%) got a caffeine kick this week when the coffee chain announced it will replace its CEO with Brian Niccol, the current Chipotle CEO. The news caused some indigestion for shares of Chipotle, which are down -2.8%. The stir in management comes as activist investors Elliott Investment Management and Starboard Value have amassed stakes in Starbucks.
With this week’s moves behind us, we look ahead and describe below the playbook in a rate-cutting cycle.
This week’s inflation and labor market data will free up the Federal Reserve to cut interest rates in September on its own terms. Futures markets are pricing in 100% probability of a 25-basis-point cut with about a 25% chance of 50 bps. We think investors should dust off their rate-cutting cycle playbooks to position their portfolios. Like a well-balanced playbook, there’s two sides to consider: offense and defense.
Defense: Bonds may have your back
Investors will likely start earning less on their cash in just 33 days. Now may be the time to consider moving out of excess cash and extend duration by buying bonds.
Why buy bonds? When you buy a bond, you capture elevated yields for longer. For example, cash yields on T-bills are still quoted above 5%, but that’s doesn’t give you the full picture. Rather, that quoted figure represents the annualized yield on a bill that matures in three months. In reality, that 5% yield means you earn 1.2% total over the next three months, and then you have to reinvest at the prevailing rate. In other words, as the Fed cuts rates, yields on T-bills should drop quickly.
Yields have already dropped. Are you too late? We believe the answer is no, even if 10-year yields have already declined by nearly 80 bps from this year’s peak. Historically, buying bonds one month prior to the first cut of a cycle delivers nearly 300 bps of excess return relative to waiting until one month after the Fed has started cutting.
Starting yield doesn’t tell the whole story. Bond prices often rise when interest rates fall, whereas cash yields remain relatively stable. For example, if you invested in a product with little to no duration, like short-term Treasury bills, you would receive the current yield over the investment period. In contrast, investing in a product with duration, like core bonds, offers the potential for both yield and price appreciation if interest rates decrease.
To illustrate, if interest rates were to decrease by 100 basis points, a hypothetical investment of in core bonds which has duration would likely result in higher returns compared to cash.
Bonds can play a key role in a defensive investment strategy by providing capital preservation, income enhancement, and diversification. As a potential rate-cutting cycle approaches, consider incorporating bonds and extending duration in a defensive strategy.
Offense: Recovery in rate-sensitive sectors
Rate-cutting cycles also offer the opportunity to play some offense, particularly in those sectors that have underperformed in part due to higher rates. Below we highlight three areas that could recover with lower rates:
Much of the impairment has been concentrated in the office sector. As Michael Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management, noted in his latest piece,~25% of workers are working from home, leading to leasers giving back 10–12% of their rented spaces. As such, developers have been considering taking aging office buildings and turning the properties into housing. Those conversions are picking up in New York, as office vacancies have risen since the pandemic. Lower financing rates can encourage developers to take on these conversions, and a lower discount rate should support property values.
Whether you want to play offense, defense or a little bit of both, now is the time to prepare for a rate-cutting cycle. Your J.P. Morgan team is here to help.
The examples provided are for illustrative purposes only and do not represent actual performance.
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.
The Solactive 2000 Index is an index that tracks the performance of the 1,001–3,000 largest companies in the US stock market. The index is based on company market capitalization and weighted by free float market capitalization.
The VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500® Index call and put options.
The Magnificent 7 stocks is a collection of high-performing companies in the U.S. stock market. They are: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.
All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.
By visiting a third-party site, you may be entering an unsecured website that may have a different privacy policy and security practices from J.P. Morgan standards. J.P. Morgan is not responsible for, and does not control, endorse or guarantee, any aspect of any linked third-party site. J.P. Morgan accepts no direct or consequential losses arising from the use of such sites.
Bonds are subject to interest rate risk, credit and default risk of the issuer. Bond prices generally fall when interest rates rise.
We can help you navigate a complex financial landscape. Reach out today to learn how.
Contact usLEARN MORE About Our Firm and Investment Professionals Through FINRA Brokercheck
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 for key important J.P. Morgan Private Bank information in conjunction with these pages.
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.