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Tai Hui, Chief Market Strategist for Asia Pacific, J.P. Morgan Asset Management, comments on the current sell-off:
“Global equity markets somewhat belated recognition of rising bond yields, along with fears that strong US jobs growth would prompt the US Federal Reserve to move more aggressively in rising rates, have combined to prompt the current market sell-off, in the absence of any fundamental factors that could derail the markets. It’s not surprising that higher bond yields are upsetting the equity outlook, we knew that would be a risk in 2018. However, it’s important for investors to distinguish between bond yields that are creeping upwards as a reflection of healthy economic growth and modestly increasing inflation – and therefore a positive development – and a bond yield surge that exacerbates volatility and undermines the rally. 
It’s healthy and normal for equity markets to experience pullbacks – average annual drawdowns in any given year can easily exceed 10% (historically the average largest intra-year decline for the S&P 500 would be around 13%, for example) and on average still deliver positive total returns on a full year basis.
We already knew that high market valuations were likely to exacerbate volatility, as was the absence of any meaningful pullback in all of last year. However, we would continue to view the latest sell-off as a healthy correction, which we believe is driven by investors taking profit on a strong 2017. Given that our positive view on underlying fundamentals remains unchanged, that we see little risk of recession and that earnings expectations remain strong, we would view this as a buying opportunity. Indeed, S&P 500 2018 earnings have actually been revised higher by 1.5% during the latest earnings seasons, partly due to the positive tailwind from US tax reform. Moreover, a key support for our optimism on global equities is that the US economy is NOT about to enter recession, which historically has been a starting gun to the bear market. All that said, investors should ensure they are diversified and incorporate less correlated sources of return in addition to maintaining exposure to growth.
We think structural global sources of demand for yield, including de-risking pensions, will effectively cap the rise in bond yields and we would be surprised to see the US 10 year Treasury rise much beyond 3% by the end of 2018.  Investors should bear in mind that nearly a quarter of government bonds are still negative yielding and more than 90% of bond globally still yield less than a 10 year Treasury, so the demand for yield should naturally act as a constrain on surging yield levels.
We don’t see the current sell-off transcending into a bear market. Bull markets don’t typically die of old age, they are usually killed by central banks aggressively hiking interest rates. Although markets are finally slowly starting to fully price in expectations of interest rate increases from the US Federal Reserve (they have been telegraphing as many as four for 2018), we don’t think central bankers will risk moving too quickly and endangering the recovery they have painstakingly coached for the last decade.”
Bob Michele, Global Head of Fixed Income, J.P. Morgan Asset Management comments on rising bond yields:
“It is difficult to see the 10 year US Treasury breaking much above 3 to 3 ¼% without a sustained increase in inflation, which would raise expectations of more aggressive central bank tightening. Central bank purchases in 2018 are on the decline to the tune of $1 trillion USD less in net purchases versus last year. Given the US Federal Reserve’s balance sheet run-off and the European Central Bank’s expected taper by end of 2018, global liquidity will turn from an expansionary flow to a contractionary flow by Q4 2018. Fiscal deficits in the US are forecasted to increase significantly over the next few years causing the supply of Treasuries to increase right at the same time that the Fed is stepping away. Global growth is firing on all cylinders. In the US, we are moving into 2018 with a lot of growth momentum from both the consumer and business investment spending. We are watching inflation which is rising. The 6 month annualized rate of core CPI stands at 2.2%, measures of prices paid are at multi-year highs and recent wage data has also shifted to new cycle highs.”
Originally published by J.P. Morgan