Markets and Economy

Select Slides From Guide to the Markets®

Get the latest insights into the key economic themes that will be affecting the fourth quarter.
J.P. Morgan Asset Management
October 10, 2016

In an effort to help you stay informed about the topics that matter most to your business, we invite you to read through a select portion of Guide to the Markets. This quarterly report from our J.P. Morgan Asset Management partners illustrates market and economic trends through a variety of succinct charts and graphs.

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Key Themes at a Glance:

Economy

The US economy continues to recover, despite slow real GDP growth. The economy expanded at an estimated 1.4 percent annualized rate in the second quarter, short of the 2.8 percent average growth rate seen in previous decades.

Today’s slow growth is likely due in large part to demographic changes. During past recoveries, the rapidly growing workforce added between 1.3 and 2.2 percentage points to GDP expansion; currently, America’s population is growing more slowly, adding only 0.5 percentage points to annual growth.

Household balance sheets continue to strengthen. Average household net worth and total assets are at all-time highs, and debt service has fallen to a historic low. The labor market also steadily improved in the third quarter. With 15.2 million new jobs created during the recovery, the official unemployment rate now rests at 4.9 percent, consistent with the top of previous business cycles. As a result of improving job opportunities, the participation rate of people who are 25 to 34 years old is rapidly rising.

The improving consumer climate has spurred strong vehicle sales: 16.9 million new cars and trucks were sold in August, exceeding the 20-year monthly average of 15.1 million. Housing prices have regained their prerecession peak, and residential construction is finally recovering. August saw 1,142 new housing starts, just shy of the 1,319 monthly average.

Fixed Income

Treasury yields are likely being suppressed by the spillover from quantitative easing abroad. Real yields on 10-year bonds have moved into negative territory, with the nominal 1.6 percent yield being outpaced by core inflation, which rose to 2.3 percent year over year in August. The Federal Reserve declined to raise interest rates at its September meeting, which leaves December as the most likely opportunity for an interest rate hike in 2016. The Fed’s Open Market Committee has signaled a quarter-point hike coming before year’s end, with interest rates gradually climbing towards 3 percent in the longer term. 

Equities

The S&P 500 sits near an all-time high; the index has gained 220 percent since its March 2008 low. The market’s average price-to-earnings (P/E) ratio has risen to 16.8, slightly above the 15.7 P/E ratio seen at the market’s 2007 peak. This is in the neighborhood of valuations typically associated with a healthy, fully employed economy.

International

International manufacturing posted third-quarter gains, with global PMI accelerating from 50.4 in June to 51.0 in August. Germany continues to see the world’s most robust manufacturing growth, with PMI reaching 54.3 in September. China’s slowdown appeared to pause, with PMI climbing from 48.6 in June to a neutral 50.1 in September.

For the time being, petroleum prices may be stabilizing at around $50 dollars per barrel. Three factors are helping to cap the downside: strong growth in global demand; a modest decline in US shale production; and the tentative agreement by OPEC to trim its output by 1 million barrels daily. At the same time, prices seem to be capped on the upside by the improving efficiency of shale production (and reduction in operating costs), as well as by the ongoing discovery of vast new shale formations.



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