The Week Ahead By JPMorgan Funds

A Tortoise on a Lunch Break

From its very start, this expansion has been a tortoise, plodding along at the

slowest pace of any post-war recovery.  The May employment report suggested the

tortoise is now on a lunch break, with a measly 38,000 payroll jobs added, far below

consensus expectations, with 458,000 people leaving the labor force.


Investors should not freak out about the lunch break.  The slide in job growth was

likely exaggerated and should mostly be reversed in the months ahead.  However, they

should think carefully about the tortoise.  This economy is quickly absorbing

whatever slack remains and, barring major policy changes, will likely see an even

more subdued growth rate in the years ahead, underlining the importance of a more

global approach to investing.


First, on the jobs report, it is important to recognize that it wasn’t quite as

shocking as portrayed in media commentary.  A gain of 38,000 jobs was well below the

consensus expectation for a 160,000 increase compiled by Bloomberg a week earlier.


However, it may well be that the consensus estimate did not fully capture the 35,100

Verizon workers that were absent from payrolls due to a strike.  In addition, key

leading indicators of employment, such as the employment indices from the ISM

surveys and the labor market conditions components of the Conference Board’s

consumer confidence index, all of which were on the weak side, weren’t available a

week earlier.  In hindsight, with those data, my own model of private sector

employment would have predicted a private sector gain of 89,000 – still well above

the reported private sector number of +25,000 – but not shockingly so.


It also needs to be stressed that any estimate or forecast of payrolls has a degree

of error attached.  My own model, which explains 89% of the variation in monthly

payroll job gains since 2005, still has a standard error of 86,000.  In other words,

under normal assumptions, the forecast should be within 86,000 of the actual number

two-thirds of the time.  In this case, the forecast would have been off by 64,000 –

just not that big a deal.


Moreover, this size of forecast error is entirely understandable.  As just one

issue, consider that not-seasonally-adjusted private sector employment grew by

697,000 in May following a gain of over a million jobs in April.  In a fast-evolving

economy and labor market, it is very difficult for the Bureau of Labor Statistics to

figure out how many jobs should have been added in May for seasonal reasons alone.


In June, the settlement of the Verizon strike should add to payroll job gains and

assuming not much other movement in labor-market conditions, a gain of

140,000-150,000 private sector jobs would not be surprising.


Moreover, demand conditions in the economy appear to be strengthening following two

very weak quarters.  Data last week on real consumer spending for April and vehicle

sales for May suggest that real consumer spending could grow by more than 3% in the

second quarter, boosting real GDP growth to 2.0%.


However, in a broader sense, the May jobs report reinforced some of the key themes

that have dogged this slow expansion and which will be important in shaping economic

and financial conditions over the next few years.  First, while the May slowdown in

job growth was probably exaggerated, a slowdown was likely coming anyway.  In the

fourth and first quarters combined, real GDP growth amounted to just 1.1% annualized

while payroll job growth ran at over 2% annualized.  The trend in productivity is

weak but it isn’t that weak and if the economy isn’t going to grow by more than 2%

going forward, it is reasonable to expect monthly job gains of only half that

amount, or roughly 100,000 to 150,000 per month.


The second theme is that, soft as demand growth is, supply growth is even worse.

The unemployment rate fell to 4.7% in May from 5.0% in April as a result of a small

gain in jobs and a 458,000 fall in the labor force.  The usual commentary on this is

that workers became discouraged and dropped out of the labor force.


However, this just doesn’t pass the smell test.  First, the actual number of

self-reported discouraged workers in May, (that is those who had given up looking

for a job because they assumed no job was out there for them) was just 0.21% of the

working-age population, the lowest percentage since September 2007.  Second, the

actual unemployment rate, at 4.7%, was also the lowest since September of 2007 and

is far below the 50-year average unemployment rate of 6.2%.  In fact, the U.S.

unemployment rate is now lower than it has been over 80% of the time in the last 50



The truth is, the decline in the labor force in May (and a 362,000 decline in the

prior month) was very likely just payback for an unusual surge in labor force in the

prior six months.  That surge, amounting to 2.4 million people, had boosted the

labor force participation.  However, the trend on the labor force participation rate

remains firmly downwards as millions of baby boomers reach 65 each year with many of

them retiring.  The most likely scenario is that dismal labor force growth will

persist and that even 2% economic growth will likely cut the unemployment rate



In the week ahead, there will be only a few data points to confirm or challenge this

picture.  Revisions to First-Quarter Productivity data should show a continued

pickup in unit labor costs while numbers on Job Openings for April and Unemployment

Claims for last week, should continue to portray a very tight labor market, albeit

lacking recent momentum.


For the Federal Reserve, provided they recognize that the trend in demand growth in

the economy still remains faster than that of supply and provided they see no sign

of an imminent collapse in demand, they should be willing to raise interest rates

next week.  But while one number doesn’t make a trend, one number is enough to scare

this Fed, making such a move now highly unlikely.


For investors, provided growth picks up in the second quarter, the outlook should

still be one of slowly rising interest rates and rebounding earnings in the short

run.  But in the long run, regardless of Fed policy, the U.S. economy is running out

of room to grow, and it will be more important than ever to invest globally to find

some foreign hares that will outpace the American tortoise even as it gets back on

the road.


David Kelly

Chief Global Strategist

JPMorgan Funds

The Week Ahead by JPMorgan Funds

Dividends While You Wait

Sometimes while you’re sitting on the tarmac on a weather-delayed flight, the flight attendants offer you something to eat or drink.  On a short delay, it doesn’t matter.  But if you could be there for hours, it’s best to get something nutritious if you can.  Similarly, when markets aren’t going anywhere fast, it matters where you hold your money while you wait.

On Friday, the S&P500 closed at 2,099.  The good news is that it is up 2.7% year-to-date.  The bad news is that it is up just 1.3% in the last 18 months.  The U.S. stock market has been stuck in the doldrums, with tailwinds of moderate economic growth and attractive valuations relative to bonds and cash being cancelled out by headwinds of worry about earnings, oil, the dollar, China and the impact of eventual Fed tightening.

However, over that same period, the average investor in large-cap U.S. stocks could have picked up a further 3.3% via dividends.  While 4.6% over 18 months doesn’t sound overwhelming, it does beat inflation and cash returns over the same period of time.  For those waiting for the market to find direction, there is a solid argument for waiting in stocks collecting dividends rather than retiring to the rather barren fields of cash and fixed income.

The first obvious point to make about dividends today is that the dividend yield on the S&P500 is roughly 0.3% above the 10-year Treasury yield.  While that is not unusual relative to recent history, it never happened once in the 50 years between 1958 and 2008.  In fact, since 1957, 10-year Treasury yields have averaged 3.2% above S&P500 dividend yields, as investors have gladly accepted lower quarterly checks in return for potential price appreciation.

Second, it is worth noting that dividend yields on individual stocks have often far exceeded bond yields.  However, this has generally occurred in cases where companies faced severe threats which would likely cause dividends to be cut in the near future.  For the overall U.S. market today, this is simply not the case.

Finally, it’s important to recognize that dividends are still growing.  It is true that they have been growing more slowly over the past year and were up just 4.6% year-over-year in the first quarter, as energy and basic-materials companies cut their payouts in response to plunging earnings in those sectors.

However, with both oil prices and the dollar stabilizing in recent months, overall S&P 500 earnings should rebound in the second half of this year and into 2017. Econometric analysis suggests that, if S&P500 operating EPS grows by 9% this year and 15% in 2017 (which, following an 11% decline last year is not a stretch), dividends per share could be up 7% this year and 10% next year.

That’s not to say that high-yielding stocks will do better than low-yielding ones. In fact, even if rates rise very slowly, a rising rate environment should be more difficult for high- dividend payers that are primarily being bought for income. However, it does argue that, with absolute stock valuations at close-to-average levels, low interest rates relative to dividends yields and both dividends and interest rates expected to rise, investors waiting for the stock market to find direction might want to consider dividends as a source of income rather than interest payments on bonds or cash.

Of course, all of this is predicated on the idea that the economic outlook is one of slow but steady growth and slowly rising interest rates.  Data and events in the week ahead should support this thesis.

Numbers on Personal Spending and Consumer Confidence on Tuesday and Vehicle Sales on Wednesday should provide fresh evidence of strong consumer momentum in the second quarter, while the Case-Shiller Price Index should continue a recent string of strong housing reports.  PMI data from Markit and the Institute of Supply Management may paint a less positive picture.  However, the April International Trade report, due out on Friday, should continue a recent pattern of improvement.  Most importantly, the May Jobs report, also due out on Friday, should show continued solid gains, albeit with payroll job growth temporarily impeded by 35,000 striking Verizon workers.  It is important to note that the household survey, from which the unemployment rate is derived, should not be impacted by this strike and a decline in the jobless rate to 4.9% would be seen as a further sign of a strengthening job market.

Other issues impacting markets this week will likely be a Japanese announcement of a new fiscal package and a potential further postponement of the sales tax hike scheduled for April 2017.  While these decisions are unlikely to jumpstart a Japanese economy that is really hemmed in by supply-side problems, they would reduce the risk of any deflationary impulse emanating from Japan.  Similarly, while this week’s OPEC meeting is unlikely to herald any new production restraint, the impact of diminished energy investment spending and supply disruptions in Canada, Libya and Nigeria are already increasing confidence that we have seen the cycle lows for oil prices.

All of this may strengthen the resolve of the Federal Reserve to go ahead with a second rate hike in June.  Confidence on this issue is necessarily low – this Federal Reserve, more than any other, speaks loudly and carries a small stick. Nevertheless, financial markets are now beginning to price in a rate hike in either June or July and such an increase in an improving economy should continue to favor equities over fixed income despite a now 18-month trend of a market moving sideways.

David Kelly
Chief Global Strategist
JPMorgan Funds

The Week Ahead by JPMorgan Funds

The Fed that Cried “Hawk”

Going into their late April meeting, nobody expected the Federal Reserve to raiserates.  One of the main reasons was that, well, nobody expected the Federal Reserve to raise rates.

Over the years, the Fed has obsessed about not surprising markets.  While there may be some short-term benefits to this in terms of greater market stability, it has the unfortunate implication that, in order for the Fed to change policy, it really needs to tee the market up to expect such a change.

This was the main problem with the FOMC statement of April 27th.  Although the statement appeared to downgrade the risks from global headwinds, it also was more downbeat on both economic growth and inflation.  If the March statement didn’t make markets believe an April hike was possible, the April statement did nothing to increase expectations of a June hike.  This was clearly reflected in futures markets where the probability of a June rate increase fell from 32% before the statement was released to just 19% in its aftermath.

It now seems that the Fed, on second thoughts, wants markets to believe a June increase is very possible.  This can be seen in recent speeches and interviews by voting members of the FOMC.  It can also be seen in last Wednesday’s release of the Fed minutes of the April meeting which included the following sentence:

“Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward theCommittee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.”

While the minutes, of course, are supposed to be a neutral record of a historical discussion, decisions on what to include and exclude and how to summarize are presumably not taken lightly and this text probably reflects a Fed decision to try to raise market expectations of a June hike.

Among the issues that investors will have to consider in the week ahead, is how close the economy is to meeting the three criteria the Fed noted.

On economic growth, we expect 1st quarter Real GDP to be revised up to 1.4% growth from an initially reported 0.5% increase.  A key issue will be the extent to which inventory accumulation remains above its long-term average, a trend which still has the potential to drag on growth in the quarters ahead.  However, expected solid readings on New Home Sales and flash PMI indices, along with early reports of another strong auto sales month in May, suggest that economic growth is probably strengthening from the first quarter.

On labor markets, investors will be watching the recently more volatile Jobless Claims numbers.  However, even with lower payroll gains in April, the economy still appears to be producing jobs faster than workers, leading to a labor market that is certainly tightening and, broadly speaking, strengthening.

On inflation, while year-over-year core CPI is still above 2%, it hasn’t moved higher in recent months.  However, overall CPI is now on a very predictable march back towards the core and oil prices now in the high 40s, combined with a recently lower dollar and higher wage growth, make it easy to argue that inflation is “making progress toward the Committee’s 2 percent objective”.

Since the release of the Fed minutes, market expectations for a June rate hike have rebounded to about a 30% probability.  But given the rather clear message of the minutes and other Fed speeches in recent weeks, the obvious question is: “why isn’t a June rate hike an odds-on favorite?”

The answer is that this is the Fed that cried “Hawk”.

On multiple occasions in recent years, when the Fed had an opportunity to wean the economy off extraordinary monetary stimulus, it shied away from it at the last minute.  The cumulative effect of this lack of resolve has been serious, distorting the most important set of prices in the economy, namely interest rates, and leaving the Fed unarmed if and when monetary stimulus is needed in the future.

The Fed worries that markets will react badly if it raises rates unexpectedly.  It would like to be able to guide market expectations.  However, this guidance will only be followed if Fed communications have credibility.

Having now worked hard in recent weeks to explain why June is on the table, provided the data remain relatively healthy, not following through with a rate hike in three weeks would only further undermine whatever credibility the Fed has left.

David Kelly
Chief Global Strategist
JPMorgan Funds



In-Depth Insights

38 Direct Links…..

AAM Industry Insight
Advantus Portfolio Perspectives
Advisor Perspectives Market Commentaries
Advisor Perspectives Fixed Income
Advisor Perspectives Alternative Investments
AllianceBernstein – High-Conviction Investing
AltX Alternatives Intelligence
AltX Alternatives Blog
Babson Viewpoints
BlackRock All Insights
Brown Brothers Harriman
Capital Innovations Insights
Conning – New Studies
Delaware – Institutional Investing
Deutsche Asset Management
Federated Investors
Fifth Street AM
Fort Washington
Goldman Sachs – Our Thinking
Greenwich Associates
GR-NEAM Quick Takes
Guggenheim Perspectives
J.P. Morgan Asset Management
Loomis, Sayles
Madison Scottsdale
McDonnell Investment Management
Miles Capital White Papers
Northern Trust – Insights and Research
Opus Investment
Payden & Rigel
PIMCO Insights
PineBridge Investments
PineBridge – White Papers
Principal Global Investors
Quadrant Real Estate
Sage Advisory
Wellington KnowledgeBank
Wells Fargo Economic & Market Perspective
Western Asset – White Papers

The Week Ahead by J.P. Morgan Funds

The Return of Rising Deficits

The week ahead should be a quiet one for markets.  The earnings season is largely behind us, with over 90% of market cap already in the door.  Various Fed officials will speak.  However, in the wake of recent lackluster GDP and employment reports, it is unlikely that their words will alter market expectations of no June rate hike.

Economic reports this week, including Import and Export Prices on Thursday and Producer Prices and Retail Sales on Friday, should confirm that both inflation and consumer spending picked up some last month, but are unlikely to lead to any major change in perceptions in either the bond or stock markets.

One unheralded report this week, however, could contain more significant information for investors focused on longer term trends.  On Wednesday, the Treasury department will release the Monthly Treasury Statement for April.  April is the most important month in every fiscal year as it contains data on highly unpredictable annual tax payments and refunds.  The Congressional Budget Office, who do a good job of estimating these numbers, believe that the surplus for April 2016 will be $109 billion, down from $157 billion a year ago.

Much of this decline can be ascribed to quirks in the calendar, with May 1st falling on a weekend this year, pushing many May payments back into April.  However, even without this, the surplus would have been down year-over-year.  Rather ominously, the CBO also notes that receipts are now running roughly $50 billion lower than they projected when they released their updated budget projections in March.

Since peaking at $1.416 trillion or 9.8% of GDP in 2009 the federal budget deficit has fallen for six straight years to just $439 billion or 2.5% of GDP last fiscal year.  However, this fiscal year, which ends on September 30th, could see the deficit rise to somewhere north of $530 billion, or 2.9% of GDP.

This, in itself, is not alarming.  However, the potential for surging deficits is clearly rising for three reasons:

First, without a major change in government policy, the U.S. economy has very limited growth potential, a point that was re-emphasized in economic numbers last week.  In the first quarter, real GDP per worker in the United States rose just 0.1% year-over-year, underscoring our lack of productivity growth.  Meanwhile, recently stronger labor force participation trends saw a relapse in April and labor force growth of less than 1%, falling to less than 0.5% over the next few years, remains likely.  Policies more friendly to business investment spending and immigration could, of course, help.  However, there is little sign of a political appetite for either.

Second, the growth in the number of elderly Americans will continue, leading to fast increasing Social Security outlays and an even more rapidly rising spending on medical services.  The latest Census Bureau projections show the number of Americans aged 65 and older rising from 47.8 million or 14.9% of the population in 2015 to 65.9 million or 19.0% of the population in 2025.  This, on its own, will put tremendous upward pressure on government spending.

Third, and most seriously, American political discourse in 2016 is being swamped by populist movements in which the propagation of ignorance is seen as a political skill. Those whose economic or budget ideas extend beyond a campaign slogan or tweet are seen as out-of-step with “the people’s anger”.

This is clearly very dangerous for the budget.  The U.S. has a chronic supply-side problem – it is essentially at full employment and lacks the ability to grow by more than 1.5-2.0% per year without major immigration, tax and entitlement reform. However, if our political system yields a new administration determined to expand demand through tax cuts or spending increases without tackling these issues, the result will not be stronger growth – it will be higher inflation and bigger budget deficits, both of which have the potential to raise interest rates.

Between now and November, this is a problem for voters.  After that, it could well become a significant issue for financial markets in general and the bond market in particular.

David Kelly
Chief Global Strategist
JPMorgan Funds

(Kelly is taking a vacation and the next report will be published on May 23)

Schroders QuickView: US jobs growth eases and wages pick up

By Keith Wade, Schroders’ chief economist, on today’s US non-farm payroll data which showed a slowdown in growth but also some encouraging underlying trends.

“Job creation slowed in the US last month with the rise in non-farm payrolls coming in at 160,000 against expectations of a 200,000 gain. Figures for the previous two months were revised down by a cumulative 19,000. The unemployment rate remained at 5%, but this was due to a drop in the participation rate by 0.2% to 62.8% as the household survey (separate from payrolls) showed a fall in employment over the month.

So, at first glance this would seem to be a soft report; however, other elements were more robust. For example, average hourly earnings growth ticked up to 2.5% year-on-year and the average work week increased by 0.4% month-on-month. The latter mis a useful indicator of GDP growth and suggests that the US economy got off to a good start in the first month of the current quarter, thus reinforcing hopes of a bounce back from a subdued first quarter.

The breakdown of job growth showed an interesting reversal of recent trends. Government jobs fell on the month, the first decline since last October. Private job growth held up well, led by professional and business services. Meanwhile, the retail sector, which has been a driver of job gains recently, went into retreat with shops and outlets shedding jobs in April. By contrast, the manufacturing sector, which cut workers in February and March, began to hire again in April. This is consistent with the manufacturing Institute for Supply Management (ISM) index, which has shown a steady trend toward better jobs growth in a sector that appears to have turned a corner after struggling with excess inventory over the past few months. Jobs in manufacturing tend to be better paid than retail thus helping to boost wages in the economy.

The combination of weaker hiring, but better wage growth, ties in with an ageing economic cycle in the US. The Federal Reserve will note this and the potential rebound in Q2 growth, but we will need to see across-the-board strength in activity for the authorities to move as soon as June.”

The Week Ahead by J.P. Morgan Funds

Five Reasons to Stay in May

With the turning of calendar, the greening of the trees, the cracking of baseball bats and the lengthening of evenings, May should be a month of optimism.  However, not in the world of financial commentary, where the old saw croaks out: “Sell in May and go away”.

While I’m tempted to ignore this altogether, the market for fear is always a strong one and there may be investors who, having consulted their calendars and their state of mind, feel they should heed this advice.  There are at least five good reasons why they should not:

(1)   Looking at S&P500 data over the past 40 years, the average monthly return doesvary by month, from a high of 1.9% for November to a low of -0.4% for September (the only month with an average negative return).  However, this variation between monthly averages is dwarfed by the normal monthly variation in returns.  From a purely statistical perspective this means we can’t be sure that any variation among monthly average returns is anything more than random noise.

(2)   There is no compelling theory as to why the market should be weak over summer months.  Bulls and bears alike take vacations.

(3)   Even if there was a statistically significant regularity in the data, one of the bedrock ideas of financial markets theory is that knowledge of that regularity should undermine it.  If selling in May was such a good idea, then markets would presumably regularly fall in May.  But if that were the case, a much wiser strategy would seem to be “Sell in April” before the May swoon.  But if investors on mass did that, the market swoon would start in April, not May, and so on.

(4)   Quite apart from the general problem of using your expert knowledge of the calendar to steal an edge on less seasonally-savvy investors, there is no reason to believe that the summer of 2016, in particular, is one to be out of the market.  The first-quarter saw a year-over-year decline in S&P500 operating EPS while real GDP growth, at 0.5% annualized, was clearly very slow.  The equity market is likely being restrained, to some extent, by uncertainty as to how much either will improve in the second half of the year.  However, we believe that, provided oil prices and the dollar are steady from here, the second half of 2016 should see a major rebound in earnings.  In addition, most of the weakness in 1st quarter GDP was due to sliding inventory accumulation and energy investment spending.  These headwinds should fade in the second half of the year and, with better earnings and GDP growth, the stock market may well do better.

(5)   Finally, if you go away in May where are you going? Super-low bond yields make fixed income investments unattractive in a stagnant environment and risky in an improving one.  Meanwhile, cash accounts, thanks to an uber-easy Federal Reserve, are paying roughly 2% less than year-over-year core CPI inflation.  In the 50 years prior to the financial crisis, investors, on average, were getting paid roughly 2% above core inflation to sit in cash accounts considering their next move.  Today, investors must pay for the privilege.

For those deciding to stick with a long-term investment plan over the summer, the week ahead should provide mixed news.  Purchasing Manager Indices, both in the U.S. and globally should still look relatively sluggish, although Europe appears to be doing a bit better than the U.S. or Asia.  U.S. Light-Vehicle Sales by contrast, should look very healthy, running at a 17+ million annualized rate.  International Trade numbers should also show some improvement at the end of a generally ugly first quarter.

However, as always in the first week of the month, the most important report will be the monthly Jobs data due out on Friday.  Despite weakness in 1st quarter real GDP data, employment indicators continue to look strong and we expect another month of more than 200,000 jobs created with a pickup in recently sluggish wage growth. These steady job gains should bolster consumer spending and housing, help government fiscal positions and may even encourage very cautious corporations to make some more investment plans.  In short, the economic outlook appears to be brightening, suggesting this should be a May to stay.

David Kelly
Chief Global Strategist
JPMorgan Funds

Schroders QuickView: French Activity Rebounds To Lift Eurozone GDP Growth

By Azad Zangana, Senior European Economist, Schroders plc

“In a bumper day of data, eurozone quarterly growth is estimated to have doubled to 0.6% in the first quarter compared the end of 2015, beating consensus expectations of 0.4% growth.

This is the first Eurostat “flash” GDP release, published earlier than normal (30 days after the end of the quarter). As a result, little detail is available at this stage. The usual 45-day release will still be published with the normal breakdown of contributions from member states.

France Leads Rebound
However, what we do know is that French GDP rebounded in the first quarter to 0.5% growth from 0.3% in the fourth quarter of 2015, against consensus expectations of a smaller bounce of 0.4%. We had expected this upturn as activity had appeared to slow in reaction to the Paris terrorist attacks last year. Indeed, the main pickup in the latest data was due to an acceleration in consumption and business investment growth.

It also means that if confidence has now recovered from the events of last year, we should see growth moderate over the rest of this year, rather than this pace of growth being maintained.

France still has significant structural issues which are unlikely to be resolved before the presidential elections next year.  Spain also surprised to the upside by growing by 0.8% for the third consecutive quarter, despite a marked slowdown in manufacturing output over January and February.

This bodes well for the rest of the year, although we do expect the annual growth rate to temper from its current rate of 3.4% to around 3% on the back of continued political uncertainty.

Otherwise, Austria also did better than expected as growth accelerated from 0.2% to 0.6% over the same period – its fastest quarterly growth rate since the start of German GDP has not been reported yet, but early indicators show a significant pickup in industrial production and retail sales, which should help Germany achieve an acceleration in its GDP when the data is published in a couple of weeks time.

Illusive Inflation
While eurozone growth appears to be on the right track, the same cannot be said for inflation, which slipped to -0.2% year-on-year in April, disappointing consensus expectations. Energy continues to be the biggest drag on the headline rate, although the core rate of inflation (excluding food, energy, alcohol and tobacco) also fell from 1% in March to 0.8% in April.

The early Easter holiday would have caused inflation to be a little stronger than normal in March and then weaker in April, but the overall picture is still poor, with inflation in some member states deeply negative (Spain -1.2%).

The recent strength of the euro, despite stimulus measures from the European Central Bank (ECB), has undoubtedly played a role in keeping inflation subdued. We continue to expect the ECB to cut interest rates further as inflation and the euro fail to respond to the ECB’s actions.

Falling Unemployment
Lastly, Eurostat also reported a fall in eurozone unemployment – down to 10.2% in March compared to 10.4% in February and 11.2% in March 2015.

The ongoing falls in unemployment suggest GDP has been growing above its potential or trend rate. Over time, this should remove most of the excess capacity in the labor market and eventually push wages and inflation higher. However, it could take another two years before we consider inflation as being back to normal – a luxury the ECB may not be able to afford given its legal mandate.

It is worth noting that falls in unemployment rates were widespread across the eurozone, suggesting that the macroeconomic recovery is broadening out.  Overall, this was a good set of data for the monetary union. Despite weaker business survey readings over the first quarter, underlying growth has proven to be more resilient.

Inflation continues to disappoint though and we remain of the view that the ECB will add further stimulus. Even if the authorities decide against this course of action, we are confident that inflation will recover in time given it is a lagging indicator. “

Short History Of Insurance Asset Management


April 2016

 The serious starting point for the growth of investment outsourcing by insurance companies can be traced to the 1980s and 1990s, in parallel with the early growth of Reactions Magazine. A latecomer, external insurance asset management has come into its own in the first two decades of the new century, placing it alongside pensions, endowments and foundations as a clearly identifiable business, and growing at a fast pace.

This modern time-frame makes insurance investment management the youngest major institutional asset management business in existence, points out Robert Goodman, global head of insurance relationships at Goldman Sachs Asset Management. Take No. 1 ranked BlackRock, for example, which first began managing money for insurers in 1991, when a private equity firm bought a life insurer and came to BlackRock for asset management advice.

This was a unique point in time, BlackRock recalls, as insurers became increasingly open to outsourcing their investment management needs or “the left hand side of the balance sheet.” In the early 1990s, this trend strengthened materially. Deutsche Asset Management and Schroders might disagree a little. No. 2 ranked Deutsche’s Scudder, Stevens & Clark signed up an insurance client in 1929, and Schroders can point to managing insurance assets for clients since 1972. But it really took until the 1990s for insurance asset management to start rolling.

This was when the current leaders began to emerge, notably Conning and Wellington in addition to BlackRock and Deutsche – the latter via Zurich Scudder which it acquired in 2002. And Schroders, too, significantly expanded its insurance efforts a decade ago with the creation of a dedicated insurance team of actuaries, insurance focused investment specialists and relationship managers.

At Wellington Management, senior managing director Richard Coffman remembers going “live” with an insurance channel in 1997, along with colleague Dick Press and a team of four or five. “We began with just four insurance clients who entrusted us with $300m. By 2000, we were working with 65 insurers that placed nearly $14bn with us.” Wellington has been a top ten insurance asset manager ever since.

Personalities came into play, too. Jerry Lynch, for example, who launched New England Asset Management (NEAM) in 1984 from a one-room office in Hartford, CT. A decade later NEAM was acquired by General Re which, shortly afterwards, became part of Berkshire Hathaway.

Morgan Stanley Investment Management (MISM) is a further example. Under the leadership of Barton Biggs, who started MSIM in 1975 only two years after joining Morgan Stanley, the firm won its first insurance client, a life company, in 1978. Incidentally, the oldest client still retained by MSIM goes back to 1985.

Along similar lines at Invesco, managing director Thomas Hughes recounts how the firm acquired a bank’s investment business in the late 1990s, together with a portfolio manager who had helped insurers with investment strategies on a small-scale . This manager’s talents became Invesco’s entry into insurance asset management and its current $20bn or more global general account assets. A different entry angle belongs to AllianceBernstein (AB). In 1984, AB’s predecessor firm Alliance Capital Management was acquired by an insurer, Equitable Life Assurance Society. Insurance assets now represent 30% of AB’s $485bn in assets under management. AB is now owned by French insurer Axa.

Those early years produced relatively modest numbers, but they set the scene for rapid growth. When 2000 came around, about 25 asset managers helped to manage the assets of insurance companies. The top 10 were responsible for $158.68bn in general account assets. Five years later, in 2005, the top 10 managers number had jumped to $507.93bn, then to $899.82bn in 2010, and two years afterwards broke through the trillion dollar mark to $1,005.53trn.

Accompanying the sharp growth in outsourced insurance assets to $1trn was a jump in the size of the manager pool, and by 2012 the contenders for insurance asset management mandates totaled more than sixty. Prominent among them were Guggenheim and Delaware, both of which moved up to the top ten.

“Insurance companies’ investment needs have changed quite a bit over the last 20 years,” comments David Holmes, head of the Insurance Asset Outsourcing Exchange. “The investment managers serving insurance companies have responded accordingly. Insurance companies today can benefit from investment managers offering deep insurance investment knowledge, cutting edge modeling capabilities and/or a range of investment solutions.”

By Alex McCallum – Editor, InsurerAM News

The Week Ahead by J.P. Morgan Funds


A hundred years ago, the youth of Europe were entrenched in a pointless and almost stationary struggle in the fields of Belgium and France.  American entry into WorldWar I was still a year away.  The war itself wouldn’t end for another two  and a half years.

However, even as a dismal stalemate persisted, the forces that would determine the war’s outcome were being set in place.  World War I was ultimately a war of resources and, to win, Germany needed to get supplies through a British blockade and stop American supplies from reaching Great Britain.  However, to achieve this, they had to attack U.S. shipping and that ultimately pulled America, with a vast store of fresh resources, into the conflict.  Even in stalemate, the eventual outcome could have been foretold.

Global financial markets also seem bogged down in stalemate today with not enough growth to push inflation or interest rates higher but not enough weakness to threaten recession.  The week ahead, while a busy one for political news, economic news and earnings reports, is unlikely to change this situation.

On the political front, the New York primary will be center stage for both parties. Despite a lively campaign for the nomination in both parties, Tuesday’s election in New York, followed by Connecticut, Rhode Island, Maryland, Delaware and Pennsylvania next week, should raise the odds of both Hillary Clinton and Donald Trump receiving their parties’ nominations on the first ballot in their conventions this July.

In U.S. economic data, numbers on Housing Starts, Home Sales and Home Prices should all show strength at the end of a mild winter.  Meanwhile, a slight dip in the Philly Fed and Markit PMI indices could suggest that, while the manufacturing sector is past the worst of its inventory correction, it is unlikely to rebound rapidly in the absence of better global growth.

109 S&P500 companies are set to report earnings this week.  So far, over 70% of companies reporting have beaten analyst expectations for EPS.  However, these expectations had been taken down radically over the past few months so that year-over-year operating EPS may end up being only marginally positive relative to a year ago.  The most interesting reports will come over the next few weeks, as energy companies adjust to very low prices.  If asset write-downs come to a halt in this sector over the next quarter or two, the potential remains for a strong H2 earnings bounce back.

Overseas, attention early in the week will be divided between oil and Brazil.  The breakdown in talks at Doha due, in large measure, to the animosity between the Saudis and the Iranians, leaves the oil status quo in place.  Eventually, a collapse in energy investment spending should restrain production and eat away at still bloated inventories.  However, in the meantime, cheap oil will continue to be a negative for energy companies and a positive for global consumers.

In Brazil, yesterday’s lower house vote to impeach Dilma Rousseff suggests that political change is finally in the offing.  However, there remains broad pessimism about the ability of any government to bring about the structural change necessary to allow Brazil to prosper in a world of low commodity prices.

Finally, at the end of the week, Flash PMI data from Japan, Europe and the United States should show a gradual improvement in global manufacturing, although certainly not enough to encourage any of the major central banks to announce a less dovish monetary stance.

Overall, then, the narrative this week may be much the same as for many months past: markets mainly in a holding pattern in anticipation of a gradual upturn in earnings and global economic growth but in fear of a disruption that could cause recession. However, for long-term investors it is important to take a long-term view.  Provided the dollar and oil hold at current levels global consumer spending should be strong enough to trigger a pickup in growth while U.S. corporate profits should rebound.  Assuming that central banks react slowly to this change in the backdrop, while this should not inflict too much damage on the bond market, it should boost stocks, validating an over-weight to equities over fixed income even in a market that seems for the moment to be going nowhere.

David Kelly

Chief Global Strategist

JPMorgan Funds