JPMorgan On "The Power Of No Return On Cash" And The End Of Positive Economic Surprises

In light of the slow start to the week, we thought we’d bring you the latest JPMorgan View, which provides a nice top-down look at the market and the economy.

This stands out:

Instead, our conversations with investors reveal that they are buying risky assets primarily because the alternative of safe bonds and cash is so dramatically unappealing. Our measure of global cash earns only 1.5%, and the broadest bond index yields only 3%. The trailing earnings yield on the MSCI AC World is 6.25% instead, to which we can add an expected global inflation of say 2.5 – 3.0% to come up with an expected nominal return of 9%. Our outstandings-based measure shows that global equity holdings have only just returned to their two-decade average (see chart), so the world is not long equities, yet.

asset allocation

Photo: JPMorgan

In terms of market threats, one thing to watch out for is that it’s going to be get much harder for the data to exceed expectations, which has been a market driver:

A 5-month long run of steady economic surprises has been a major driver of this rally. Our Economic Activity Surprise Index, which measures the balance between positive and negative economic surprises in US activity indicators over a rolling 6-week period, has been in positive territory over the past 5 months, echoing the 7-month long run seen in Q2/Q3 2009 (see middle chart). But with expectations having been adjusted upwards over the past months, the bar has risen for the economic data to continue to surprise on the upside. From a tactical perspective, this is one of the important indicators to watch. A potential move of the US EASI into negative territory will make equity markets
more susceptible to a near-term correction given that most technical indicators are already in overbought territory.


Photo: JPMorgan

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