Market update

The S&P 500 dropped -1.8% this week. That turned October gains into losses – the first negative month in the last six.

This week, data showed the U.S. economy continued to expand at a strong pace in the third quarter. GDP grew at a 2.8% annual pace for the period. Consumption was particularly strong growing 3.7% (versus consensus estimates of 3.3%). Consumption saw a big boost from the goods sector and it seems like a big standout was non-durables goods (autos, household furnishings and recreational items).

The strong economic data pushed yields up. The two-year (4.15%) is up five basis points, and the 10-year (4.28%) has risen four basis points.

It was also the busiest earnings week of the Q3 season. Apple (+1% pre-market) and Amazon (+5% pre-market) reported last night, while Google, Meta and Microsoft all reported earlier in the week.

In commodities, dissipating geopolitical risk catalyzed a -3.8% drop for crude oil this week.

While it was a busy week in macroeconomic and corporate data, investors seemed distracted by the U.S. Election. Uncertainty may be high now, but we want to offer our thoughts on three of the most important issues for investors: tax policy, government debt and deficits and what happens if the race is too close to call.

Election preview

What will happen with tax policy? Congress will need to focus on tax policy next year. At the end of 2025, many of the provisions from the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire. If Congress does nothing, individual tax rates would revert to 2017 levels, the 20% deduction for small business income would end and the estate tax exemption would be cut in half (from $28.6 million to $14.3 million for a married couple). Importantly, the corporate tax cuts included in the TCJA were permanent. In all, if the temporary provisions in the TCJA expire, personal tax rates would revert higher and it would result in a 1.8% reduction in after-tax income for all U.S. households, and a 3.1% reduction for the top 1% of earners.

That is why we think at least a partial extension of the TCJA is likely under any potential composition of government. Former President Trump proposes extending all of the 2017 tax cuts. Vice President Harris is proposing a partial extension of cuts but allowing cuts to expire for households making $400,000 or more. Of course, the House and Senate will have a lot to say about the shape of tax policy, so watching more than just the results of the presidential race is critical.

Even now, we are focused on tax efficiency across portfolios and asset location in an effort to mitigate tax impact. That could become even more important after 2025.

How bad could it get with the debt and deficit? Neither candidate has made lowering the U.S. fiscal deficit a focus of their campaign. In fact, we think the deficit will grow under either candidate. If all of the policy proposals from the campaign trail become reality (unlikely), the deficit could increase by over $1 trillion over the next 10 years under Harris, and by nearly $4 trillion under Trump.

That is why it makes some sense that bond yields have increased along with odds of a Republican sweep. But we think the more important driver recently has been surprisingly strong U.S. economic growth, labor market and consumption data. Heading into the election, the Bloomberg Treasury index is set for its first monthly loss since April.

While we view the debt and deficit trajectory as a risk, we think some of the fear is misplaced. In fact, current all-in yields give investors a second bite at the apple. For anyone who felt they missed the opportunity to add to core bonds, this may be your second chance.

What happens if the election is too close to call? In a standard election, the presidential candidate can often be confirmed the night of the election. Traditionally, the Associated Press (AP) declares winners on a state-by-state basis only when they are confident that the trailing candidates no longer have a path to victory in that state. Once a candidate accumulates 270 electoral college votes, the AP and media agencies call the race.

After election day, a standard process is followed through to inauguration day, outlined in the table below.

In certain cases it takes longer to count the votes, or a race is too tight to determine a winner. For example, the AP did not call the closely contested race in 2000 between George W. Bush and Al Gore. Their assessment was that the margin in Florida made it too narrow to say who won. Then, it took 35 days for the Supreme Court to end recounts and effectively give the election to Bush. Markets may hate uncertainty, but even in 2000, there were more important factors at play.

The S&P 500 fell -4% from election night until the Supreme Court ruling in December, but it wasn’t necessarily the election that caused the sell off. Instead, equity markets were grappling with the bursting of the tech bubble. That could be seen in the returns. The Nasdaq 100 and S&P 500 tech sector sold off by double digits, while other sector declines were much more muted or in some cases produced gains.

In 2020, when it took four days for AP to call the race, 10 of the 11 sectors produced gains. The market even rallied while the results were contested in the courts, and the electoral process survived the armed insurrection at the Capitol.

It is difficult to say when we will know who won this election, and it’s possible that we may not have a clear answer for a week or two. In the event of a close election, we would expect to see court challenges and other legal action through the end of the year. It is also important to note that the 2022 Electoral Count Reform Act was meant to strengthen the mechanisms that ensure a clear implementation of election results.

What does it all mean for your portfolio? It means sticking to your plan. Volatility may be elevated, but elections happen every four years. Since 1984 there’s only been one election year where the market was lower 12 months after the election – in 2000, amid the tech bubble.

Equity market volatility tends to fall relatively quickly after the new composition of government is confirmed and on average, equities are higher 12 months after the election. Said differently, don’t let an election derail your plans – election outcomes don’t drive market returns over the long run.

Reach out to your J.P. Morgan advisor for any questions on how you can position your portfolio to help you achieve your goals.

All market and economic data as of 11/1/2024 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.

Private investments are subject to special risks. Individuals must meet specific suitability standards before investing. This information does not constitute an offer to sell or a solicitation of an offer to buy. As a reminder, hedge funds (or funds of hedge funds), private equity funds, real estate 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

Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment, and reinvestment risk.

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.

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.

Private Equity is typically composed of Venture Capital, Leveraged Buyouts, Distressed Investments and Mezzanine Financing, which are all generally considered to be high risk, illiquid investments designed to deliver larger expected returns than publicly traded securities as compensation for their greater risk. As a result, investing in Private Equity is not suitable for all investors.

Index definitions:

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 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.