Guide to the markets

Each quarter JP Morgan produce a comprehensive guide to the markets, pages full of economic charts and tables. For many people, nerds excepted, it would be as interesting as a county bus timetable or a train spotter’s manual. For an investor it is a gold mine of invaluable information. The guide is then followed by an excellent webinar for advisers, presented by Karen Ward, a Chief Market Strategist at JP Morgan. Yesterday’s first quarter presentation was no exception. In it Ward posed the most pressing question facing investors – is this a good to buy equities or is there a risk of further falls, even a big bear market of 50% on par with the tech bubble bursting and the global financial crisis? Her response was that there is more downside potential if company earnings expectations deteriorate. However this would be unlikely if four things happen.

1. The Federal Reserve pauses

If the Fed, the US central banks takes its foot off the accelerator on raising interest rates it will be good for markets. Currently there is a disconnect between economic data and financial markets. The former suggests the economy is good whilst the latter is a signal of a slowdown.

2. Trade wars ease

There are signs that US and China are being impacted negatively. New manufacturing orders have fallen and in the US corporate investment has stalled. However things could get worse. The 2nd of March is crucial date as US tariffs on $200 billion worth of Chinese goods are set to rise from 10% to 25% if a deal is not forthcoming.

3. China steps up the stimulus

China had been clamping down on credit. Now in response to a slowdown it is increasing release of credit in a targeted manner, bringing in a range of tax cuts and increasing infrastructure spending.

4. European and Brexit risks abate

This is mainly geo-political risk. Brussels and Rome have come to an agreement on the Italian budget but problems in the Italian economy remain whilst its bond market is one of the largest in the world. Ward noted however that the sharp fall in the oil price has been like a tax cut for European consumers.

In conclusion Ward was reasonably confident that the Fed would pause, China would up the stimulus and Brexit would be OK but she was less certain about Europe and trade wars easing. Here there is a deeper issue about geo-political and global economic dominance between the US and China.

Another issue is the direction of quantitative tightening (QT), the reversal of massive bond buying programmes (QE). QT will need careful management so that governments reduce their balance sheets without triggering a major sell-off in fixed interest markets. This would cause rising interest rates, harm the money supply and send economies into recession.

Although Karen Ward did not expect the sky to fall in there were plenty of “ifs” and this requires a cautious approach by investors. However at the start of 2019 I am more optimistic than I was at the end of 2018. I think sentiment has been worse than the economic fundamentals and I expect 2019 to be a positive year for equities. Interestingly Wall Street firms have said the same.

The content of this blog is intended for general commentary only and is based on my understanding of the JP Morgan presentation. Nothing in this article should be construed as personal investment advice, for example to invest in equities. You should seek individual advice based on your own financial circumstances before making investment decisions.