What’s the Move? by J.P. Morgan | Episode 1: Market Tricks or Treats?


[intense eletronic music plays] Ted: Welcome to the
first episode of What’s the Move?
by J.P. Morgan. This is a new series coming to
you monthly where three guests disclose what
events they think will move markets the most over
the next month. I’m Ted Dimig, the Head of
Investments for You Invest by J.P. Morgan
and your host. So, it’s October. This month’s a bit spookier
than the rest and that’s not just because
of Halloween. October is also known for the
infamous October Effect because historically it’s one of the most volatile months
for stocks. So, what might move markets? Let’s see what our guests think. This month, I’m joined by three
colleagues and friends from J.P. Morgan. First up is Rashmi. She’s a portfolio manager
specializing in emerging markets and has over 17 years of
investment experience. Next, we’ve got Jordan, who’s
a market strategist. He identifies and researches
economic trends around the world for
our clients. And last, but not least,
is Mike. Mike is a portfolio manager who
scours the globe for potential investment
opportunities. Okay folks, let’s get it on. Jordan: I think it may be
corporate earnings revisions. Michael: I think it may be the
U.S. consumer. Rashimi: I think it could be data and policy announcements
out of China. What a glorious day. The sun is shining, the taxi
cabs are honking, and I’m joined by three of my good friends
and colleagues on the first episode of
What’s the Move? Rashmi, we’re gonna kick it off
to you to start today. Your high conviction idea,
specific to what’s going to drive markets in October,
is China. What are you looking at and what
should we pay attention to? So, for October I think China
is going to be of great significance for
markets on two fronts. First, I think that we should
be looking at the data that comes out
of China. Second, we should be looking for
any new policy response from China, either in terms of
trade relations with the U.S., we’ve seen some olive branches
in September, or in terms of growth
stimulative measures to support their own
economic growth. Why October in particular? So, October of 2019 is actually a very important month for China
in particular. It is the 70th anniversary of
the founding of the People’s Republic
of China. It is also only two years away
from the 100th year anniversary of the
Communist Party of China. In light of these events, China
has some economic growth targets which they’re looking to
achieve, and some policy goals that they’re looking to achieve. So, you may see steps taken
to ensure that they get to those goals. So, specifically, if I were to
take a step back and think about what you just put forward,
this is the end of a very long semester and China’s about
to get their report card. If there’s not straight A’s,
they may do some things to help improve the academics of
what’s going on in the economy. -Exactly.
-I’m a U.S. citizen, I live in New York,
we’ve got clients that live across the country. Why does your focus on
what’s going on in China matter to them? Rashmi: Sure. So, why China? China is the 3rd largest
driver of global growth. It is also a very important
driver of incremental growth. Meaning, changes to growth
either positively or negatively. Additionally, many companies and
consumers in the United States are affected by China. For example, we import goods
from China. So, if the cost of those
goods goes up, that can hurt consumers in the
United States. It can also impact companies
who may import goods or services from China. If China’s economy is slowing or
if their growth is not achieving the targets that they have, it
can also impact companies here that export goods to China. And remember, China is a market
of 1.4 billion people. So we do have very strong ties
to them. It can be considered a very
important market for a number of our companies. Thus, it does matter a lot
for any investor no matter where they are
in the world. So lots of data points to be
focused on: huge economy, biggest, or one of the biggest
drivers of growth. Stay tuned. Jordan, the primary point of
focus that you want to talk about are earnings and more specifically earnings
revisions. Why does that matter for the
month of October? Yeah, so the month of October,
what we’re going to see is a slew of corporate earnings
revisions and essentially what that means is industry
analysts will take a look at what their forecasted
earnings were back in last quarter, given we have
a better outlook of what the next 12 months
look like, they will revise those
earnings estimates up. If things are looking better
than expected, they’ll revise them down if
things aren’t looking as good. This is really important because
the fundamental driver of stock prices in the long run
are earnings. And, given a market that’s up
close to 20% year to date, just got back from Vegas, I wish
my checking account was up 20%, but given a market that’s up
so big, you’re going to want to see, or investors are going
to want to look at, is there a fundamental picture,
i.e. earnings estimates, for stock prices to continue
to rise further? I personally think that
revisions are actually going to be revised lower for
three main reasons. One reason is: I think there’s
growth is going to slow in the US, and then the global
economy next year, I think rising wage pressures
are going to eat away at corporate margins, and I
think that a stronger dollar year to date is going to
be a headwind for earnings, particularly because a large
set of multinationals within the U.S. generate earnings
overseas, and a stronger dollar should be a headwind for
revenues going forward. So, you’ve just put forward a
bit of a trifecta of bearish data points that you’ll be
focusing on, all predicated on the fact that the direction
of earnings historically may be indicative of the direction of
a stock price. Michael, the consumer, it’s
the driving force of the U.S. economy. What are you focused on
going forward specific to their health? Sure. I think the health of the
U.S. consumer is key when you’re thinking about
U.S. growth overall. U.S. growth has been slowing
this year and I think the question that everyone is
asking themselves right now is: will we continue to slow such
that we have a recession or something close to it, or can
we stabilize here and perhaps even pick up a bit
as we head into next year? And I think it’s just important
to remember that economic data,
macro data, doesn’t necessarily always give the same message
that stocks give, right? So, last year if you read
the newspapers, you saw economic growth
was fantastic. And if you owned U.S. stocks
last year, you lost money. This year, growth has
been slower than last year, not quite
so fantastic. Specifically, very poor
as it relates to the manufacturing sector
and stocks are up a substantial amount. You’ve made a lot of money
in 2019. So, stocks are going to begin
to price now what the growth outlook is
for next year because stocks always
forward looking. So, we know that manufacturing
has slowed quite substantially. The question is – the disease
that currently exists in the manufacturing sector, is it going to spread to
the services sector, or, more broadly,
the consumer? And if the answer to that
question is yes, it could be a rough ride
for stocks. And so, I’m really watching
three things that relates to consumer data. Number one, consumer confidence
took a bit of a dip in August because we’ve had some
negative trade headlines, want to see that pick up again. Number two, retail sales have
been fantastic. We need to continue to see that
remain very robust. Number three, we want jobless
claims to stay low because if companies start
laying off workers that’s a sign, perhaps, that
we’re about to enter a recession and it could be bad
for stocks overall. Okay. So, we’ve got China,
we’ve got earnings, we’ve got the consumer
and their health. I’m going to open it up for
a bit of a discussion. Rashmi, we were talking earlier
today about the consumer, and you mentioned a couple of
interesting things to me. Why don’t you share them
with Mike? Sure. So, Mike, one question
that I have as I think about the consumer. We know that of course they’re
one of the big bastions of strength for the
U.S. economy. But, do you consider that to be a leading or
a lagging indicator? Typically, the consumer is
a lagging indicator. So, typically manufacturing
might weaken first and then the consumer weakens,
and then by the time you see that the consumer is
weak, it’s too late and stocks are already down. Me specifically, I like to focus on certain consumer indicators
that I think tend to lead the overall growth picture. So, I mentioned jobless
claims before, that’s one that’s particularly
important. You should see jobless
claims start to rise if the weakness in manufacturing
is being spread to the consumer. And so, that’s one of, I think,
is important to keep an eye on. Jordan, back to you. Are there any sectors within
the U.S. today that you think that there might be some
opportunities to find attractively valued stocks? Yes. Interestingly, I think that
there may be opportunity in some of the value sectors of
the market, particularly when I look at sectors like energy,
financials, the value sectors, they actually look undervalued relative to their
long run history. And so, energy companies
generally have gotten better at keeping their costs
low and fracking. You’ve seen higher oil prices
year to date, so that should help margins
within the energy sector. I also think that within
financials, consumer businesses are doing fairly well as
consumers remain healthy. M&A activity remains
pretty robust. Equity market volatility may
remain elevated and so trading desk can
benefit from that. And so, there are
fundamental opportunities as well as a valuation case
for I think some of the value sectors
of the markets. Rash, one final question for
you, and let’s go back to China and I’m going to tie it
into Dr. Mike over there who’s looking at the health of
the U.S. consumer. Historically, China’s been a big exporter–
-Yes. –and we had been one of the
importers of their goods. If we’ve got a sick U.S.
consumer, how is that going to play into what you’re
looking at specific to China? The manufacturing segment of
China’s economy has also been weak. But, as I mentioned China
is very forward thinking, they have very long-term plans. And for, I would say at least
the last 10 to 15 years, China has made a very notable
shift from focusing on manufacturing and
export driven growth to focusing more on
consumption driven growth. And that’s why I think the
stimulus that you’ve seen out of China hasn’t been
focused on exports. It’s been focused on things to
support consumers like tax cuts, incentives for innovation,
lifting people from poverty. So, the way I like to think
about what you just put forward specific to China is that when
emerging market countries become less emerging–
-Yes. -the fundamental makeup of their
economies change– -Yes.
-and what may have been true in the past, in terms
of weakness tied to consumer, may not be true going forward. Especially for a country like
China that plans so far in advance, that is
top-down driven, and has such a large population. Excellent. So, you’ve got
three ideas: China, earnings, and
the consumer. At the end of the day, the
markets will decide. And note everybody, these are
just ideas, they should not be confused
as recommendations. I’d like to thank all of you
for joining us again on the first episode of
What’s the Move? And then, there’s one
little surprise. Halloween is a time of tricks
or treats, and I don’t know if you guys have ever
seen these before, but there is a type of jelly
bean that you can buy that has a combination of
delectable delights that are sweet and cherry
and chocolate, but there’s a couple of tricks
in the mix. If you’re lucky, you can
get peach. If you’re less lucky,
that peach may be barf. And you don’t know, it’s
trick or treat. [intense eletronic music plays] ♪

Leave a Reply

Your email address will not be published. Required fields are marked *