Here is part 2 of my commentary of JPMorgan’s third-quarter Guide to the Markets series and out of the slide deck.
Every year, there will be some sort of a fall, and the question is how deep is the fall. Here is an up-to-date one and by and large, the average fall is 14% and we probably have a bigger one.
The chart above shows the performance versus the intra-year drawdown for bonds.
If you think bonds are not volatile, think again. You would lose money on bonds if you do not speculate well, but the drawdowns tend to be more shallow.
But perhaps because a lot of people felt that they are safer, they would put a larger allocation compared to other risky assets. When a greater pool of money becomes more volatile, you lose more.
You can see this year’s performance against the data going back to 1976.
It is the worst.
The right side of this chart shows the return and duration of bull and bear markets. The bull markets typically last longer and are greater in magnitude.
Some may view that the bear markets may be very uncomfortable and you might wish to prepare yourself that they could last 2 years in some cases.
The chart on the left is getting popular in terms of risk coaching. It shows the annual return you will need to get back to the recent highs. A 28% rise needed might look huge but if we have 5 years to make it back to the top, it is just 6.6% a year, which is quite plausible.
This chart shows that recessions have different magnitudes and it is not always a super big deal. But some are rather big deals.
Consumer confidence, measured by the University of Michigan, goes back to the 1970s. This looks like the worse confidence.
In the last 50 years, we have seen some really volatile times and it is interesting that consumer confidence has never been as worse as this.
Too many jobs-to-jobseekers, very, very low layoffs.
Inflation in the US on average runs higher than in Singapore. The energy CPI looks a bit crazy.
Here is more of a reference of the dollar, relative to history.
Here is a chart showing the composition of the Federal Reserve’s balance sheet. They have not successfully tapered in recent years. It is a question of whether they can do that without breaking things.
This chart helps us appreciate the current bond valuations, relative to history. It shows different types of bonds and their relative bond valuations.
The problem I have with this chart is that the range covers the past 10 years, which is pretty much a similar economic regime.
Based on the past 10 years bonds are trading at very attractive valuations.
I think investment-grade US bonds and mortgage-backed securities are very attractive if you believe the economic regime is not going to change much.
The high-yield bonds are not cheap yet.
I think not many people realize high-yield bonds used to trade above 10% yield!
Real estate long-term can be seen as a pseudo-bond-equity product. The chart on the left gives us good sense of the average yield spread over the 10-year treasury. That is about 3%.
You want to buy when the yield spread is wide on the up.
Currently, we are near the average.
On the left, you can see office vacancy remains high, there is still a huge demand for industrial but retail and apartment demand has moderated.
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