Dear Investors,
JP Morgan Asset Management – 2Q23 Market’s Review
“After a difficult 2022, the first half of 2023 was kinder to balanced portfolios. Developed market equities delivered 15% year to date and 7% over the quarter.”
Japan focus
“The best performing major equity market in local currency terms, both over the quarter (up 14%) and the first half of the year (up 23%), was Japan.”
“The yen weakened versus other major trading partners as interest rates remained low in Japan.”
“Bank of Japan maintained its yield curve control policy to anchor government bond yields, while interest rates ratcheted higher in most other countries.”
“This weakness in the yen helped support Japanese stocks, many of which earn a significant proportion of their profits abroad.”
“Of course, the yen weakness would have reduced the extent of the equity gains for unhedged foreign investors.”
US focus
“US stocks were the next best performing market in local currency terms, up 9% over the quarter and 17% for the year to date.”
“These gains were driven almost entirely by the largest growth stocks (think “mega-cap tech”)
“Which are disproportionately found in the US, with the rest of the market delivering much more muted returns so far this year.”
Fixed income focus
“Within fixed income, the best performing assets so far this year have been high yield credit and Italian government bonds
“both returning about 5%, while the worst performing has been UK Gilts, down just under 4%.”
“High yield credit and Italian debt benefitted from their higher starting yields and economic resilience.”
“UK Gilts, on the other hand, suffered in the face of ongoing inflation headwinds that led markets to price an even higher interest rate peak of around 6% and for rates to stay higher for longer.”
Sentiment on artificial intelligence
“The strong return for stocks so far this year has been helped by the fact that the much-anticipated rise in developed world unemployment is yet to materialize.”
“US inflation might be able to moderate significantly without the need for a rise in unemployment.”
“Positive sentiment around artificial intelligence has also driven spectacular performance for some of the world’s largest stocks.”
Franklin Templeton – Strong move in equity markets before recession
“We continue to believe a recession is the most likely outcome given the continued deep red reading of the ClearBridge Recession Risk Dashboard and the speed with which economic momentum can deteriorate.”
Strategic midpoint
“The year’s midpoint is a natural time to reflect on how events have unfolded relative to expectations.”
“This is a key element of success for many investors, and an endeavor we undertake regularly.”
“Six months ago, 2023 was expected to witness the most anticipated recession ever.”
“U.S. equities pricing a return to positive EPS growth in the second quarter and a sharp acceleration through the second half.”
“By contrast, economists’ forecasts suggest GDP growth will continue to slow in the coming quarters.”
“While nominal GDP growth is expected to remain positive, this is largely a function of inflation”
“which is expected to cool further but remain well above the Fed’s 2% target through 2024.”
“This conflicting view presents a dilemma for investors on which camp has a more accurate read on how the next six months will unfold.”
Soft landing
“The case for a soft landing has been buoyed by recent strength from the housing sector, one of the most interest-rate sensitive areas of the economy.”
“Housing starts experienced their largest monthly pickup in over three decades in May.”
“At the same time the S&P/Case-Shiller U.S. National Home Price Index has bounced in its two most recent readings.”
“This strength has bolstered the idea that the U.S. economy could experience a series of rolling recessions in specific sectors”
“partially the result of post-pandemic normalization (which impacted different areas of the economy at different times).”
“In this scenario, the overall economy might never enter a recession as pockets of strength in one sector offset weakness in another.”
Strong move in equity markets before recession
“One pillar in the soft-landing case has been the strong move in equity markets so far this year.”
“Markets are forward looking, but they are not always right.”
“In modern history (since World War II), the market has experienced a positive return 42% of the time in the six months prior to the start of a recession and been positive 25% of the time in the three months prior.”
“Returns during both periods have typically been muted, with investors clinging to the bull case until the very end.”
“Simply put, positive price action (and the absence of a large downturn in equity markets) does not preclude the economy from slipping into recession.”