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Our Thinking

Bracing for the Cold

Andrew Goldberg, Global Head of Client Investment Strategy, J.P. Morgan Private Bank

Anthony Chan, PhD, Chief Economist for Chase

Jacob Manoukian, Investment Strategist, J.P. Morgan Private Bank

Preparing portfolios for a cooler market climate

After nearly 10 years of relatively warm, sunny conditions, the forecast is turning colder and grayer for investors. To be clear, we haven’t yet reached the end of the cycle. While no blizzards loom on the immediate horizon, we’ve already begun to prepare our global portfolios for harsher weather ahead.

Economic growth prospects are cooling

We’ve said all along that any imbalances within U.S. and global economies could usher in the end of the current business cycle. So what are we seeing these days?

United States. The labor market continues to tighten. The unemployment rate has fallen to 3.7%, a level that we associate with full employment (see chart).1 As a result, the Federal Reserve seems set to continue raising interest rates to cool down the labor market.

“We firmly believe our preparations for slowing economic growth will help clients optimize their portfolio performance until it’s summertime once again for markets.”

Andrew Goldberg

Global Head Of Client Investment Strategy, J.P. Morgan Private Bank

Falling unemployment, rising wages

The U.S. economy may start to cool as interest rates continue rising in an attempt to slow down wage growth and inflation pressures.
Left: Unemployment rate, Right: Wage inflation (year-over-year)

falling unemployment rising wages

Source: BLS, Haver. Data is as of October 31, 2018.

As the cost of capital continues to rise and the boost from fiscal stimulus wears off, the U.S. economy is likely to slow as we approach 2020. However, we’d need to see several more boxes checked off before assuming the end of the cycle is close at hand.

Europe. Major European economies are starting to slow. Missed expectations early in 2018 were widely blamed on inclement weather, but it appears that weakness has spilled over into the second and third quarters of the year (see chart). We’re keeping an especially close eye on political turmoil, which has contributed to deteriorating sentiment and may continue to impact economic growth, corporate profits and stock values going forward.

A slowdown in Europe

After steady growth throughout much of 2016 and 2017, European economic activity has decelerated in 2018. (Purchasing Manager Indices > 50 = expansion)

a slowdown in europe

Source: IHS Markit, Haver Analytics, October 2018.

Asia. China’s economy is facing stiff headwinds from clampdowns on shadow banking, declining infrastructure spending and negative business sentiment due to mounting trade tensions. In response, the country is now injecting fiscal stimulus and easing monetary policy—moves that some believe could boost economic growth by as much as 1% within the next year.2 But despite such efforts, China’s weakness has spread to many of its trading partners, including Japan, South Korea, Taiwan, Singapore and even the Philippines.

Emerging markets. We’re seeing weakness in Turkey and Argentina along with pessimistic forecasts in places like South Africa, the Czech Republic, Ecuador, Uruguay and Venezuela. Emerging countries that carry a lot of dollar-denominated debt are feeling the negative effects of higher U.S. interest rates. In addition, trade tensions are limiting some nations from exporting their goods and services to America.

Turning up the heat on interest rates
The lowest U.S. unemployment in 49 years3
gives the Federal Reserve plenty of reason to continue boosting short-term interest rates. We expect the Fed to increase rates by another 1.25% through the end of 2019. That should push corporate borrowing costs closer to the point of exceeding the potential returns on investment spending. When this happens, companies are incentivized to save rather than invest—and economic growth suffers as a result.

“We expect the Fed to increase rates by another 1.25% through the end of 2019.”

Andrew Goldberg

Global Head Of Client Investment Strategy, J.P. Morgan Private Bank

Winterizing our clients' portfolios
At J.P. Morgan, we're taking the following steps to adjust portfolios in light of our latest economic and market outlooks:


What does it all mean for you?

Although we think winter is approaching for investors, current U.S. imbalances don’t appear to be as severe as what we saw before the financial crisis. With that in mind, we firmly believe our preparations for slowing economic growth will help clients optimize their portfolio performance until it’s summertime once again for markets.


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