J.P. Morgan Chase Share Price Analysis

Last Twelve Months

At first glance it seems that 2018 has been a seemingly downbeat year for JPMorgan stocks, which closed the year with a share price down 9.9%. Much of this selloff however, was in fact a direct response to the increasing uncertainty and volatility emerging across US equity markets towards the second half of the year, instead of being a reflection of the firms overall annual performance. Across its four main business segments, underlying fundamentals point towards a more positive outlook for the firm than the market would otherwise indicate, especially considering the bearish sentiment experienced across equities in the last quarter of 2018. Although JPMorgan’s Corporate and Investment Banking division maintained its number one ranking in advisory fees, the Consumer and Community Banking unit consistently achieved returns on equity exceeding those estimated by analyst’s reports. This is most likely resulting from the growing income stream it is able to generate from its investments in innovating its current line of credit cards. As such, one could take the view that JPMorgan’s recent share price movements have not accurately reflected the intrinsic value of the firms underlying operations, which could indicate towards a potential correction to the upside in the first quarter of 2019.

The contrasting signals feeding into the relative strength of JPMorgan shares were a recurrent theme across 2018. Despite encouraging internal indicators showing the firms healthy financial condition, JPMorgan shares were never close to recreating the extraordinary performance it posted in 2017 stemming from a range of external macroeconomic factors that waned on investor expectations. Firstly, when assessing the strengths of the U.S. equity market across 2017 and into January of 2018, a large proportion of the third and fourth quarter bullish run must be attributable to the GOP’s Tax Cuts and Jobs Act reform. Furthermore, as investors had already priced this fiscal stimulus into their valuations of relative equity prices before the tax cut bill went into effect (on 1stJanuary 2018), this pivotal driver of upwards momentum, that initially carried JPM shares and many other banking stocks alike to record highs posted in the first quarter of 2018, had little influence in determining future share price direction moving into the rest of 2018. Additionally, the mounting concerns of a premature continuation to the Federal Reserve’s monetary policy tightening cycle worsened following a partial yield curve inversion in the third quarter of the year. Although, the firm’s commercial banking arm could stand to prosper from increasing rates in the form of rising net interest margins; which in this case can be defined as the difference between its deposit and loan rates, a contraction in monetary stimulus could prompt the beginning of an economic slowdown across the US economy. This was the likely basis to why JPMorgan shares suffered so significantly in the final quarter of the year, as banking shares are viewed as a bellwether for the strength of the overall economy, thus when economic signals start to deteriorate, banking stocks are the first to feel the strain. As seen in the chart below, the final quarter of 2018 saw a breakthrough below the key support level of $107.00, primarily triggered by the Federal Reserve raising rates for a fourth time that year. Later that quarter on December 24th, JPMorgan logged its 52-week low of $92.14, compared to its year high of $118.77 on February 26th.[i]

[ii]

Outlook of JPM share price performance across the medium term for early 2019

Technical analysis adds weight to the fundamentals, pointing towards a potential rally in JPMorgan shares in early 2019. The graph below looks at two key areas of price stability to predict future tendencies in price movements. The MACD, which is an indicator that follows the momentum of a security by tracking the relationship between two different length moving averages, shows possibility for a sustained upswing starting in the first quarter of 2019 to correct the apparent undervaluation in JPMorgan stock following the recent selloffs in October and December respectively. Meanwhile a combination of the Relative Strength Index, Bollinger Bands and Standard Deviations, which all to some degree measure volatility, together indicate less share price instability, which should help to stabilise JPMorgan’s trading volumes back to normalised levels and encourage investors to return to holding long positions in its shares as opposed to moving in and out of the stock for speculative reasons to capitalise on the heighted volatility that peaked late last year. In addition to this, the Cboe Volatility Index®, which is a broad measure of U.S. equity market volatility, has also declined rapidly since its high of 35.5 on 26thof December 2018 to 19.51 (January 18th). This hints towards a gradual return in confidence across U.S. equity markets, which could feed through to restabilising revenue generation in Credit Trading, Rates and Commodities units within the Corporate and Investment Banking division, all of which were particularly sensitive to the market turmoil of late last year.

[i]JPMorgan Chase & Co Quarterly Earnings Report, 2018

[ii]Morningstar.com, http://www.morningstar.co.uk/uk/

[iii]Trading 212.com, https://www.trading212.com/