US Markets Loading…
This story is available exclusively to Insider subscribers.
Become an Insider and start reading now.
- Markets have experienced a number of once-in-a-decade events in the first half of this year.
- Many major banks and asset managers have released their mid-year outlooks for what could happen next.
- We asked strategists from 5 leading institutions to outline the most compelling graphs from their outlooks.
- See more stories on Insider’s business page.
It’s only been seven months into the year and markets have already witnessed a multitude of once-in-a-decade events.
Retail traders flocked to no-fee brokerage apps and coordinated short squeezes against well-known hedge funds, while the US stock market has continually reached new all-time highs.
Cryptocurrencies also hit record highs, with bitcoin reaching around $64,800 only to then lose half its value in a matter of weeks afterwards. Bitcoin (BTC) currently trades around $31,800.
And value investors that waited years to witness rotation back to more cyclical stocks got little more than a brief taste of that at the start of the year before flows reversed back into growth stocks.
Considering so much has happened in the first half of the year, investors are left wondering what’s left to happen in markets over the second half of this year.
Many major investment banks and asset managers have released their mid-year outlooks to outline their expectations for the second half of the year.
The outlooks provide insight into how the firm’s are thinking about major topics, such as will the equity markets go higher or stay flat, or whether bond yields will continue to march higher and, of course, when the
might start tapering.
Sometimes the outlooks come to loggerheads as shown by the differences between JPMorgan Asset Management’s and Goldman Sachs’ outlook on equities. However, diving deep into a variety of outlooks can help investors prepare for what’s ahead.
“We think equity markets go higher over the rest of the year, and over the next 18 months in particular,” said JPMorgan Asset Management’s global market strategist Michael Bell, describing the firm’s outlook. ” … Things may get a little bit choppier as well, as we don’t think that the discussion around tighter monetary policy is going to go away.”
“From a valuation perspective, equities during the next six months are more likely to experience multiple contraction than expansion,” Goldman Sachs analyst David Kostin said in a July 2 chartbook that looks back at the first half of the year as well as how to play the second half.
Insider asked five leading investment banks and asset managers to share their most compelling graphs from their mid-year outlooks to help investors navigate the markets the rest of the year.
Here are their top picks:
Stock Market 13 must-see charts
Stock Market 1. A temporary COVID adaptation leads to a more permanent economic change
has fallen less than 1% since the onset of COVID while employment has dropped 4.4%, said Citi Private Bank’s global investment strategist, Steven Wieting. This is an unusually strong divergence even for a
/recovery period, he added.
COVID has hit labor-intensive industries, such as hospitality, much harder than others. These sectors have a low GDP weight but employ many, Wieting said.
However, this is not the only reason for the gap, Wieting said. The bank believes that learned adaptions to COVID has also shifted the economy and will change the economy permanently.
“Remote work and greater penetration of digital commerce has lifted the economy’s output per worker,” Wieting said. “Businesses are unlikely to take actions that will reverse those gains.”
According to Wieting, the investment implications are:
- Commercial real estate may see a more limited recovery than seen in single-family housing.
- E-commerce and digital services will sustain a larger share of the economy than in the pre-COVID period and still grow beyond.
Stock Market 2. The rise in inflation isn’t global
The chart highlights the rise in inflation has not been global, Charles Schwab’s chief global investment strategist Jeffrey Kleintop said.
The European Central Bank and Bank of Japan are not under the same pressure to rein in stimulus as the Federal Reserve, he said.
“That could mean that strong economic data in the US, especially on jobs, could be un-welcomed by markets, since it may mean the Fed moves more rapidly than anticipated,” Kleintop said. “But good economic news overseas may remain positive for stocks outside the US.”
Stock Market 3. The Federal Reserve still has work to do to make up for past inflation shortfalls
“This chart shows how much work the US Federal Reserve has to do to achieve its new goal of letting inflation run above target to make up for past shortfalls,” Jean Boivin, head of the BlackRock Investment Institute, said. “The shaded region shows how high the Fed would need to let average inflation run over the next two years to make up for previous shortfalls. This level of inflation is higher than even recent-decade highs reflected in market pricing.”
Stock Market 4. The success and failures of “mean reversion strategies”
Since April 2020, Citi Private Bank has said its asset allocation and discretionary portfolios have a “pro-cyclical bias”.
This means unwinding positions in assets that have priced in recovery most aggressively, Citi Private Bank’s global investment strategist Steven Wieting said.
“As an example, we began an overweight in US small cap stocks in April 2020, and went underweight in April 2021,” Wieting said. “We’ve used the funds to reinvest in global healthcare where we see stronger growth and less risk.”
One of Citi Global Wealth’s investment themes for 2021 is “mean reversion”, which is a financial theory that suggests historical returns eventually will revert to the asset’s long-term average level.
The bank has found that “mean reversion strategies” only work in the first year of economic recoveries. During the remainder of expansions, firms and industries that outgrow the economy perform best, Wieting said,
To-date, the theme has worked well for Citi, Wieting said, with the hardest-hit industries of 2020 have rallying the most.
“The two charts show that ‘mean reversion’ in 2021 doesn’t erase the long-run outperformance of the industries that are posing a technological challenge to incumbents,” Wieting said. “As the recovery progresses, ‘COVID-driven dispersion’ is likely to linger. While there are still some ‘pure recovery’ opportunities in global markets, sustained growth opportunities are beginning to stand out again.”
Stock Market 5. The impact of supply shortages are slowly trending downwards
“This chart shows that the number of companies mentioning shortages impacting their business remains elevated but has been trending down for the past 8 weeks, suggesting fewer supply shortages affecting production lowering the risk to earnings estimates,” Charles Schwab’s chief global investment strategist Jeffrey Kleintop said.
Stock Market 6. US labor market tightness drives wage growth
JPMorgan Asset Management’s division expects shelter inflation to see a more sustained rise, whereas core goods inflation could come down quite sharply and service inflation could remain elevated compared with recent history.
One of the drivers for this outlook is US jobs. The chart shows in the leisure and hospitality sector, there’s still plenty of workers relative to job openings. However, in many other sectors there are more job openings than there are people who lost their jobs since COVID, said JPMorgan Asset Management global market strategist, Michael Bell.
“You’re starting to see signs of some labor market tightness in some sectors, we think that will be supportive for wage growth, as we head through next year,” Bell said. “So all in all, it nets out to a world where we think core inflation is going to be a bit of off target, but probably somewhere in the region of 2.5 percent by the end of next year, as opposed to anything more significant than that.”
This means the above-target inflation that will allow the Fed to feel comfortable with tapering at the beginning of next year and putting rates up in 2023, Bell said.
“But not in a way, which really shakes markets too much,” Bell said. “And certainly not the kind of runaway inflation that some people have been talking about. So we think, in the region of 2.5 percent of the core inflation next year.”
Stock Market 7. The narrowing of consumer confidence could drive market volatility
The confidence surveys are starting to show a significant narrowing of the gap between assessments of current conditions compared to economic expectations, UBS Asset Management’s head of multi-asset strategy Evan Brown said.
“On the one hand, this development is a testament to the strength of the global recovery,” Brown said. “But historically this is also associated with a peak in global purchasing managers’ indexes and waning economic momentum thereafter.”
Historically these inflection points can cause market volatility, Brown said. This is as investors try to assess the extent of the loss of momentum and the future equilibrium for the growth rates of activity.
“Global equities at the headline level have yet to register a meaningfully negative reaction to this inflection point,” Brown said. “Therefore, we do not believe it is a prudent time to increase equity risk until other cyclically sensitive assets, such as copper and developed market sovereign bond yields, show more concrete signs of stabilization.”
Stock Market 8. The impact of misjudging the climate transition
“Understanding the implications of climate change and any green energy transition for strategic investment portfolios warrants taking a more granular view of asset classes than ever,” BlackRock Investment Institute’s senior portfolio strategist Vivek Paul said.
This chart shows the impact of misjudging the climate transition could be as high as a 7% annualized return differential over five years between the technology and energy sectors – those most likely to be affected by the transition, in our view, Paul said.
“This is a significant difference in a world of low expected returns,” Paul said.
Stock Market 9. Re-evaluating defensive growth leadership
“While cyclical stocks had been outperforming lockdown-era defensives for most of this year, the outperformance gap closed sharply in the last several weeks,” Charles Schwab’s chief global investment strategist Jeffrey Kleintop said.
Kleintop said this is best illustrated in the chart comparing airline stocks and internet retailers.
“Despite outperforming since February as the vaccine rollouts accelerated, airline stocks ended up underperforming internet retailers on a year-to-date basis,” Kleintop said. “The rapidly spreading delta variant may be the reason for the rotation back to defensive growth leadership.”
Stock Market 10. Bond yields rising and the pace of rate hikes
“We think that the rally in bond markets has gone too far and when we look ahead to the end of the year, we think Treasury yields will be higher than they are now,” JPMorgan Asset Management global market strategist Michael Bell said.
In the charts, it’s noticeable how real yields are still deeply negative, Bell said. He expects real yields to move higher.
Real Life. Real News. Real Action
Zillion Things Mobile!Read More-Visit US
The market has brought forward the yields in the line with the timing of the Federal Reserve’s first rate hike, but also pushed down the expected pace of subsequent rate hikes, Bell said.
“We think that’s ultimately wrong,” Bell said. “We think that the market is pricing in too shallow a pace of interest rate hikes beyond 2023.”
“So you can see that on the left-hand side current pricing going broadly in line with what we think and what the Fed is saying, then going up at a pretty slow pace,” Bell said. “And so we think beyond that, those rate hikes in 2023, it goes up a bit quicker and further than the market currently expects.”
Stock Market 11. Elevated economic activity levels and the impact on bond yields and equities
Economic activity will stabilize at an above-trend level, in our view, UBS Asset Management’s head of multi-asset strategy Evan Brown said.
“Estimates for 2022 GDP growth in the US and Eurozone have remained firm even as US Treasury yields retraced a significant portion of their year-to-date advance,” Brown said. “These forecasts, if realized, would mark the strongest annual growth for either region in the 21st century (excluding 2021).”
The amount of fiscal stimulus, to-date, is larger than it was in the aftermath of the financial crisis. So, ensuing retrenchment will likely be neither as sudden, nor severe, Brown said.
Household balance sheets are in a healthier position, buoyed by excess savings. Brown said. The outlook for capital spending is also robust, he added.
“In our view, sovereign bond yields stand out as an asset class that may have overshot to the downside in light of the vigor this economic recovery is likely to retain,” Brown said. “In addition, we believe that ex-US developed market stocks have already more than discounted the extent of the likely loss in growth momentum and are well-positioned to meaningfully outperform as investors’ focus shifts to the robust run rate for global activity in the coming quarters.”
Stock Market 12. The continued outperformance of value
JPMorgan Asset Management expects value to outperform led by the outperformance of financials, said JPMorgan Asset Management global market strategist, Michael Bell.
“I think the main takeaway for us would be that the rotation into value will reassert itself having given up some ground, value is still ahead year-to-date,” Bell said. “But over the last couple of months, as bond yields came down, growth stocks have outperformed, we know bond yields will move higher from here, at least by the end of the year, that should take value off on a relative basis compared with growth.”
The chart highlights one aspect that supports this, which is the valuations of growth stocks versus value stocks.
“We just think that’s a headwind to further outperformance for growth stocks,” Bell said.
The reason growth stocks outperformed is because of this significant increase in valuations, Bell said. This is something that’s unlikely to happen again, he added.
“It may be that these come down and the earnings offset that,” Bell said. “But we do think it’s a headwind for growth outperformance particularly in a world where bond yields move higher and weigh on their valuations that support relative performance and value stocks, particularly financials.”
Stock Market 13. Long term bond correlations to equity positions
“With the recent surge in inflation, asset allocators are concerned about whether bonds can perform their traditional role as diversifying hedges to equity risk,” said UBS Asset Management’s head of multi-asset strategy, Evan Brown. “In our view, safe sovereign debt can still retains this important diversifying role in portfolios because is still able to offer efficacious protection against downside in procyclical, relative value positions.”
The chart demonstrates the correlations between long-term US bond indexes and the S&P 500 equal-weight index versus the S&P 500, as well as value stocks compared to the MSCI World index have remained reliably negative in 2021, Brown said.
“Conversely, long-term US bonds have had extended periods of co-moment with the MSCI World year to date,” Brown said.
Get the latest JPM stock price here.