Before You Book That Vacation, JPM Warns Multiple Spoilers Are Converging In November

Tyler Durden's picture

One week ago, Jan Loeys - the person who wrote "The JPMorgan View" for 15 years - announced his exit, as he transitioned from tactical asset allocation to longer-term strategy, and that he would be handing over the authorship to John Normand, and soon Nikos Panigirtzoglou and Marko Kolanovic, but not before summarizing what he has learned in 30 years of investing in a must-read bulletin which he published last week.

In any case, this weekend it was Normand's turn to regale JPM's countless retail and institutional clients with a preview of the upcoming key "spoilers" which according to Normand boil down to 3: a reality check on US tax reform, weaker-than-expected China data, and a Russian rethink on extending oil cuts. Not surprisingly, JPM focuses on the first issue, because as Norman writes, "tax overhaul seems the most complicated market driver given its fluid composition and tortuous legislative process."

By contrast, China’s slowdown looks familiar and was already part of our economists’ baseline; hence, our neutral recommendation on base metals ex aluminum. The November 30th oil producers’ summit is not a drop-dead date for extending their year-old agreement, but we took profits anyway on a long Brent trade last week because oil’s geopolitical premium looked excessive.

For those curious what the largest US bank thinks will be dominant events over the balance of the month, here it is straight from the horse's mouth.

How much tax reform is priced?

 

Readers of The J.P. Morgan View may realize that this edition is the first in 15 years without Jan Loeys as lead author. Jan has transitioned from tactical asset allocation to longer-term strategy. The View will now be authored by a different team, which hopefully maintains Jan’s succinctness and relevance while introducing complementary approaches to cross-asset strategy.

 

The growth trade that has dominated markets since late summer – higher yields, equities and commodities; tighter credit spreads and lower volatility – has stalled for a third-consecutive week, depending on one’s benchmark. US small cap stocks, probably the best barometer of US tax reform hopes, peaked in early October. Base metals began moving lower a week later. Most major stock indices are flat-to-down over the past week while credit spreads have widened (US high-grade +5bp, US high yield +20bp) and volatility has rallied (VIX +2%, VXY +0.5%) To be sure, these retracements are trivial relative to what risky markets have delivered year-to-date: returns are still running at least twice their long-term average for most equity markets, and in some EM sectors (local bonds, FX carry).

 

Multiple spoilers are converging in November, such as a reality check on US tax reform, weaker-than-expected China data, a Russian rethink on extending oil cuts. We’ll focus on the first issue, because tax overhaul seems the most complicated market driver given its fluid composition and tortuous legislative process. By contrast, China’s slowdown looks familiar and was already part of our economists’ baseline; hence, our neutral recommendation on base metals ex aluminum. The November 30th oil producers’ summit is not a drop-dead date for extending their year-old agreement, but we took profits anyway on a long Brent trade last week because oil’s geopolitical premium looked excessive.

 

The central question around tax reform should be What’s priced? Obviously the higher the expectations, the less upside on stocks and maybe bond yields and the dollar into year-end if Congress meets its somewhat unprecedented timetable of passage by Christmas. Conversely, another stalemate as befell healthcare reform could trigger a decent correction. We call Congress's schedule somewhat unprecedented because proper tax overhaul like Reagan's involving both lower rates and simplification required over 10 months to agree, as measured from the first House vote to Presidential signature. Just cutting taxes has been easier: Clinton’s initiatives in 1997 and Bush's in 2001 and 2003 only required two months.

 

The Trump Administration has proposed Reagan-like reform, but our economists’ view has been that Congress will probably only manage Bush-like cuts. This means $1.5trn of gross unfunded tax reductions over 10 years, but more like $1trn net due to expiring provisions. These sums translate into little growth impulse once considered in annual increments, then discounted further to account for household and corporate tendencies to save some portion of tax givebacks. JPM Economics didn't raise 2017 or long-term growth estimates after Trump's election, nor after his tax proposal emerged in October. We’re still at 2.2% yoy for 2018.

 

 

Strangely given surging news trends around the tax topic, most survey and market-based measures suggest limited optimism. For example, consensus growth expectations (Blue Chip survey) have barely moved since the election. In January 2017, forecasters expected 2018 US growth of about 2.4%; that projection only risen to 2.5% since. It’s true that the S&P500’s forward P/E multiple has risen by about two points since the election, but EPS projections for 2018 (IBES basis) have not – they’ve been in a $146-$148/share range since November 2016. The implied 10% year-on-year growth in earnings next year would match 2017’s pace, even next year should deliver stimulus. By contrast, our Equity strategists think that just lowering the statutory corporate tax rate from 35% to 20% would add $12/share boost to any baseline.

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NDXTrader's picture

Central banks still as loose as a whore on nickel night? Yep. We go up

gmrpeabody's picture

If they are neutral to short oil.., perhaps it's time to look long.

Just saying...

johngaltfla's picture

Translation:

JPM has some WAAAAAAYYYY out of the money puts to unload before they take a donkey kong up the ass.

Please put your sucker dumb butts up to the table and buy, buy, buy!

DeadFred's picture

They are failing to mention that arrest records exist for Hillary Clinton, age 70, from Little Rock and Chappaqua NY, arrested in Westchester Co, NY; and for John Podesta, age 68, of Washington DC, brother of Anthony, 74, arrested in District of Columbia district court; and for Anthony Podesta, age 74, of Washington DC, arrested in District of Columbia district court; and for Huma Abedin, age 42 is listed in the arrest report not 41, of Washington DC, Pine Brook NJ and New York NY related to Sahela Abedin age 77, arrested Second Circuit Executive Court NYC

Can't find the correct Cheryl Mills

A James Comey of McClean VA of the correct age was arrested by the Second Circuit Court NYC but there isn't any data to confirm he is the much coveted James Comey.

I used Search Quarry to get this data but didn't want to pay for the reports. Any one want to spend the price of a modest dinner to make everyone's day? And start a civil war? What do you think the reaction will be when this gets out (assuming I'm right)? Gold up 3% on Monday and Dow down 2% is my guess but what do I know?

If someone gets arrested and the press ignores it are they still arrested? Just curious

syzygysus's picture

Shit, if that was true, you’d pay the records search, assuming there is a cost and be the biggest name on alt right media.

Utter bullshit.

DeadFred's picture

Why would I want to be the biggest name on alt media? <shudder> SearchQuarry.com., easy to find, easy to use. Go for it and prove me wrong. I may be misunderstanding what I'm seeing but it isn't BS.

DeadFred's picture

It's not BS but it turns out it is foolishness. I rechecked with some names I am pretty sure have never crossed the law and the site still returns a report. Crossing the paywall would likely produce a "No arrests" report. Imagine my embarrassment (and utter disappointment) :(

house biscuit's picture

What, are you 12 years old, or just a useless cunt?

christiangustafson's picture

"Limited optimism" ... We're in a depression, folks.

Stuck on Zero's picture

I differ with you christiangustafson. The middle class is in a depression. The illuminati are in the greatest economic expansion in history.

???ö?'s picture

"converging" as in the FBI swat teams are converging on JP Morgan headquarters.

kiwimail's picture

Not sure what your comment was but I gave you a thumbsup for the avatar.

buzzsaw99's picture

in a must-read bulletin...

must read bulletin, lol, yeah, three thumbs up. lolz

Dragon HAwk's picture

Russia= Lots of Oil Lots of Gold, stay tuned.

Chris88's picture

Oh, I thought the yield curve being cut in half the past 12 months was a sign of major optimism.

FredGSanford.'s picture

Thing are gonna crash in November. Lol.

gcjohns1971's picture

The politcs have grown strong on this site:

#becauseJEWS

#becauseClintonCrimeSyndicate

#becauseAmericandecline

#becauseRussiaRules

#becauseCapitalists

#becauseSwamp

 

Tyler, we used to have some raw economics here.  Can we have something that doesn't fall into the above formulas?

Please?

Let it Go's picture

It is quite naive to think legislators polarized and unable to agree upon anything can tackle an issue as complex and divisive as tax reform. Even more outrageous is the idea they can do it quickly. More on why we should be ready for another Washington failure in the article below.

 http://Tax Bill If Passed Will Fall Very Short Of Promised.html

Rentier88's picture

pst jpm, don't give a fuck don't own anything in rigged stock market anyway.