By Alan Wynne & Paul Jacobson

Market Update

Markets had a clear view on who they thought won Tuesday night’s debate.

Vice President Kamala Harris saw a seven-point shift in her favor from betting odds after the hour and half debate against former President Donald Trump. While the race is still viewed as a toss-up, markets moved towards a greater probability of a Harris victory.

While elections may not have much of an impact on the broad markets, there are some segments of the market that are more sensitive to political outcomes. Investors generally think that a Trump victory would be negative for Oil prices due to more production. They also believe that a Harris victory would be better for companies that are supported by Biden era bills such as Inflation Reduction Act beneficiaries, renewable energy stocks and semiconductors (due to the CHIPS Act). As you can see in the chart below, Harris aligned assets delivered strong performance the day after the debate.

Green economy stocks (+4.1%) and renewables (+4.0%) outperformed, as did oil (+2.1%) (lower odds of increased supply put upward pressure on prices). Semiconductors (+4.4%) also outperformed. While the CHIPS Act provides tailwinds for semis, demand for chips and other key components in the artificial intelligence (AI) arms race are likely to increase despite either political party being elected. Indeed, Nvidia (+16%) roared back after falling -14% last week. Their CEO touted strong demand for their new Blackwell chips. In fact, customers are “tense” over the competition to get the most chips, fastest.

Some tactical trading opportunities may exist around the election, but don’t let them derail your plans. Since 1950, there have been 18 Presidential elections and 10 transitions in the White House between Democrats and Republicans. Over those 74 years, U.S. GDP growth has averaged a 3.2% annual pace and the S&P 500 has compounded at 9.4% per year. 

For the week, equity markets are heading towards a higher close. The S&P 500 (+3.3%), the Nasdaq 100 (+5.5%) and small caps (Solactive 2000 +1.7%) are all taking part. Gold continues to shine as well, reaching another all-time high this week.

After uninverting for the first time in 567 trading days last week, two and 10-year yields are trading close to where they started the week, which is near the lowest level in a year. Investors expect the Federal Reserve to lower their policy rate by 25 basis points next week to kick off their easing cycle. Even though longer-term yields have fallen, we believe investors still have opportunity to move out of cash and into bonds. Here’s why.

Have you missed it?

Two-year Treasuries have fallen nearly 60 basis points so far this year, and the 10-year is at its lowest level in over a year. With yields in the high threes for both of those tenors, the yield component may not entice investors off the sideline, and some might think they missed the rally. We don’t think that’s true, particularly when we talk about the other areas in fixed income which still have meaningful yield to offer. Here are three reasons why we don’t think you’ve missed the rally.

1. Municipal and investment grade yields are still attractive. The investment grade (IG) index now yields just under 5% of the Bloomberg Municipal Bond 1-15 Year Index at 5.1% on a tax equivalent basis. Those are pretty solid yields, especially when compared to our 7% return estimate for U.S. large cap equities from the J.P. Morgan Asset Management’s 2024 Long Term Capital Market Assumptions.¹

2. Supply is creating opportunities for buyers: Short-run excess supply has elevated municipal yields, which we think will fall around November. Year-to-date (YTD) by the end of August, municipalities issued $344 billion of bonds – the most over the same period since 2008. Election risk, which was highlighted by the Harris-Trump Debate last Tuesday night, has investors paying attention to policy that could alter the Alternative Minimum Tax (AMT) calculation, the municipal bond tax-exemption and the State and Local Tax (SALT) deduction, among many other initiatives. That’s incentivizing municipalities to issue debt ahead of the election to avoid incremental volatility.

Municipals offer value: Right now, Bloomberg Municipal Bond Index yields are above their long-term average. Outside of the inflationary sell-off and Covid-19, they haven’t been this high since 2013.

Where might I capture that yield? The long-end of the curve has the most value. Since April, we have seen a dramatic shift in the Bloomberg Triple-A (AAA) yield curve. The front end has rallied the most, rates compressed by about 60 basis points at the short end. That drove outsized returns in the Bloomberg Municipal 1-Year (1-2) Index; +2.4% YTD. And at the long end of the curve, rates decreased. But with the expected Fed cutting cycle, this portion of the curve still has room to run and it’s also why we still see value there.

Looking at municipal ratios (municipal yields divided by Treasury yields, with higher ratios indicating municipals discounted to Treasuries) valuations are lowest priced at the 10- and 30-year part of the curve. When we look at current ratios vs their 1-year mean, the 10- and 30-year segments imply the highest degree of relative value.

Going forward, we expect tax-exempt net supply to be a building headwind. When we consider the expected municipal market discounting we anticipate in the fall, coupled with the view that absolute rates will drop over the Fed easing cycle, we conclude the next two months could offer an opportunity to buy municipal bonds.

3. Bonds can have your back if there is a recession. While not our base case, some investors have been concerned that a recession is on the horizon. If the growth slowdown is more pronounced than we expect, that means an even stronger return environment for bonds. In that environment, the Fed would need to embark on a more aggressive rate-cutting cycle to support the labor market, further driving up bond prices. In the last 12 Fed cutting cycles, core bonds have returned on 17% on average. Furthermore, if a recession occurred during those cutting cycles, core bonds returned 20% on average.

Regardless of the fixed income vehicle you choose, we think cash rates will be lower by the end of next week. Therefore, it's time to consider exiting excess cash to extend duration. Municipal valuations suggest they may be an attractive destination for that cash, but core bonds also merit a place in investor portfolios.

If you’re wondering which allocation could be right for you, your J.P. Morgan advisor is here to help.

All market and economic data as of 09/13/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

DISCLOSURES

The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.

In general, the bond market is volatile and bond prices rise when interest rates fall and vice versa. Longer term securities are more prone to price fluctuation than shorter term securities. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss. Dependable income is subject to the credit risk of the issuer of the bond. If an issuer defaults no future income payments will be made.

Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the Alternative Minimum Tax (AMT).

Diversification and asset allocation does not ensure a profit or protect against loss.

Index definitions:

JPMAM Long-Term Capital Market Assumptions: Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only – they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations.

“Expected” or “alpha” return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only – they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control.

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results.

Oil: The ICE Brent Crude futures contract is a deliverable contract based on EFP delivery with an option to cash settle.

IRA- Green Economy: JPM IB Stock Analysts identified US companies likely to benefit from Green/EV/Climate provisions of the Inflation Reduction Act. These companies are expected to benefit from the multi-year spending outlays within the bill. Constituents are heavily tilted towards Industrials and Utilities sectors. Liq Weighted on construction.

Renewables: JPM IB basket of liquid basket of renewable energy and related stocks. Screened for hard-to-borrow names and M&A deal targets. Optimized for liquidity with a 4% weight cap.

Semiconductors: JPM IB basket of Semiconductor stocks which follows the iDex methodology. Quarterly rebalanced with a 2.0% cap-weighting,  using a 90 day dollar notional trading estimate. Monthly a takeover and borrow screen is applied. Levels shown under this ticker are indicative.

The Russell 3000 Index is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S. stock market. It measures the performance of the largest 3,000 U.S. companies representing approximately 96% of the investable U.S. equity market.

The S&P 500 Equal Weight Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight of the index total at each quarterly rebalance.

The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

The S&P 500 Equal Weighted Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance.

The Magnificent Seven stocks are a group of influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

The Magnificent 7 Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, Tesla) classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).

The S&P Midcap 400 Index is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market.

The S&P 500 index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Bonds are subject to interest rate risk, credit, call, liquidity 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. The index was developed with a base level of 10 for the 1941–43 base period.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases. 

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

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.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

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.

JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. Information presented on these webpages is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.

RISK CONSIDERATIONS

• Past performance is not indicative of future results. You may not invest directly in an index.
• The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to 'stock market risk' meaning that stock prices in general may decline over short or extended periods of time.
• Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.
• In general, the bond market is volatile and bond prices rise when interest rates fall and vice versa. Longer term securities are more prone to price fluctuation than shorter term securities. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss. Dependable income is subject to the credit risk of the issuer of the bond. If an issuer defaults no future income payments will be made.
• When investing in mutual funds or exchange-traded and index funds, please consider the investment objectives, risks, charges, and expenses associated with the funds before investing. You may obtain a fund’s prospectus by contacting your investment professional. The prospectus contains information, which should be carefully read before investing.
• Investors should understand the potential tax liabilities surrounding a municipal bond purchase. Certain municipal bonds are federally taxed if the holder is subject to alternative minimum tax. Capital gains, if any, are federally taxable. The investor should note that the income from tax-free municipal bond funds may be subject to state and local taxation and the alternative minimum tax (amt).
• International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the united states and other nations. Investments in international markets can be more volatile.
• Investments in emerging markets may not be suitable for all investors. Emerging markets involve a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the united states and other nations. Investments in emerging markets can be more volatile.
• Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.
• Real estate investments trusts may be subject to a high degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower.
• Investment in alternative investment strategies is speculative, often involves a greater degree of risk than traditional investments including limited liquidity and limited transparency, among other factors and should only be considered by sophisticated investors with the financial capability to accept the loss of all or part of the assets devoted to such strategies.
• Structured products involve derivatives and risks that may not be suitable for all investors. The most common risks include, but are not limited to, risk of adverse or unanticipated market developments, issuer credit quality risk, risk of lack of uniform standard pricing, risk of adverse events involving any underlying reference obligations, risk of high volatility, risk of illiquidity/little to no secondary market, and conflicts of interest. Before investing in a structured product, investors should review the accompanying offering document, prospectus or prospectus supplement to understand the actual terms and key risks associated with the each individual structured product. Any payments on a structured product are subject to the credit risk of the issuer and/or guarantor. Investors may lose their entire investment, i.e., incur an unlimited loss. The risks listed above are not complete. For a more comprehensive list of the risks involved with this particular product, please speak to your J.P. Morgan team.
• As a reminder, hedge funds (or funds of hedge funds) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss. These investments can be highly illiquid, and are not required to provide periodic pricing or valuation information to investors, and may involve complex tax structures and delays in distributing important tax information. These investments are not subject to the same regulatory requirements as mutual funds; and often charge high fees. Further, any number of conflicts of interest may exist in the context of the management and/or operation of any such fund. For complete information, please refer to the applicable offering memorandum.
• For informational purposes only -- J.P. Morgan Securities LLC does not endorse, advise on, transmit, sell or transact in any type of virtual currency. Please note: J.P. Morgan Securities LLC does not intermediate, mine, transmit, custody, store, sell, exchange, control, administer, or issue any type of virtual currency, which includes any type of digital unit used as a medium of exchange or a form of digitally stored value.
• The prices and rates of return are indicative, as they may vary over time based on market conditions.
• Additional risk considerations exist for all strategies.
• The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
• Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.