This past Tuesday we had the pleasure of attending a lunch at the Capital Grille in Paramus hosted by JP Morgan Chase. Amongst all the great food and atmosphere, we were very interested in some of the ideas and analysis presented during the lunch and wanted to share some of these insights with you.
Volatility is Normal
Despite a significant downturn in late 2018, the market has had an excellent start to 2019, with the S&P 500 already up 11.5% year to date (as of 2/26/19). The chart above shows intra-year declines of the S&P 500 (the red dots) measured against the annual returns of the same year (the gray bar) over the past 39 years. The underlying theme of the chart is that despite average intra-year drops of 13.9%, the S&P 500 has had positive returns 29 of the past 39 years.
High Yield is paying a 6.5% yield
High-Yield bonds as balance sheets for corporations have remained solid and default rates are extremely low. The chart above shows default rates (blue line) over the past 30 years and compares the current default rate of 1.77% to the 30-year average of 3.73%.
Investors invest in what they know
The presentation also dove into behavioral investing and the biases that retail investors use when making investment decisions. Looking at the chart above, the bar chart on the left shows that U.S investors invest 70% of their assets in domestic markets, while only 24% of the global GDP is made up of U.S assets. The chart on the right breaks down investor biases by region in the U.S, showing that investors in the U.S invest heavily in the industries that are local to them, for example Financials in the NYC area and Technology on the west coast. The thesis behind this chart is that U.S investors are afraid to invest outside of there comfort zone, which can have detrimental effects on long-term growth in a portfolio.
In short, JP Morgan’s Macro View of the market is not focused on making predictions for the future, it is instead focused on seeking opportunities using well thought-out analysis and historical performance figures. And with that mindset, some significant opportunities may be in High-Yield and International/Emerging Markets.
**The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results
