Chase Private Client | Our Thinking | Navigating a Maturing Cycle

Our Thinking

Navigating a Maturing Cycle

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

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

image of compass

When we were preparing our investment outlook for 2019 in the fall of last year, Fed Chairman Jerome Powell said that interest rates were “a long way from neutral.” This implied that the Fed had a long way to go in its rate-hiking cycle, and that seemed like a risk to markets and the economy. Sectors that are sensitive to interest rates (like housing) were already suffering, and the rest of the world failed to take the baton from the United States as an engine of growth. It seemed like the conditions we thought necessary for recession (restrictive interest rates, slowing global growth and the imbalance of an indebted corporate sector) would all be in place by the first half of 2020.

The stock market recognized the risks we had identified much earlier than we expected, and declined by 20% from September to Christmas Eve. After the sell-off, the Fed changed its tune. Instead of saying rates were “a long way from neutral,” Chairman Powell said he was “listening sensitively to markets.” Investors took this to mean that the rate-hiking cycle would pause, and risk assets (like stocks and high yield bonds) rallied in relief. Their hunch was correct: Last fall, the median FOMC member expected the Fed to raise rates twice in 2019 and again in 2020. Now, the median FOMC member doesn’t foresee any moves in 2019 and a rate cut in 2020. This changes things.

Threat of overtightening seems off the table

Fed funds rate, %

graph showing the threat of overtightening seems off the table

Source: Bloomberg, June 2019.

There is still a chance that the Fed may have already tightened monetary policy to a level that could cause a recession, but we think it is more likely that rates are low enough to accommodate further growth. Valuations across asset classes are now close to or above long-term averages, which seems appropriate for the current environment, but we don't think the coast is clear. Despite the Fed’s pause, the U.S. economy is still late in the cycle, and growth looks set to slow. Last year, the U.S. economy was being driven by three engines: business investment, fiscal spending and the consumer. The first two supports are now fading. While the consumer should be able to keep the economy growing, it won’t be enough to match the pace of the recent past.

Globally, the manufacturing sector is still working its way through a rough patch, and trade is weak amid tariff tensions between the United States and its trading partners. However, modest stimulus from Chinese policymakers and relatively healthy domestic conditions should act as a ballast against these headwinds. In short, our base case calls for growth rates to continue to slow, but not to recessionary levels that would cause the Fed to cut rates significantly. However, a downside surprise seems more likely than one to the upside at this point.

To be clear, our view of “no recession” in the near term is not sufficient for us to take outsized risk in portfolios. So what are investors to do? We are focused on three key themes.

Participation with protection

After 10 years of strong returns, we believe it is time to add more protection to portfolios—and there is a range of ways to do so. We think a focus on quality, both in stocks and bonds, is prudent. Higher-quality securities tend to outperform lower-quality ones in times of market stress. We also suggest adding duration in fixed income. This can support portfolios should markets take a turn for the worse. Other non-correlated asset classes could further cushion portfolios from equity losses. Finally, begin to rotate from stocks to bonds. It is too early to do this in a wholesale fashion, but we believe it is time to gradually change the composition of multi-asset portfolios.

Harvesting yield

We are sharpening our focus on generating returns from yield rather than from capital appreciation. There are multiple yield-harvesting tools to use across asset classes. Diversifying fixed income remains a core strategy, especially in a world of low default rates. Municipal bonds may make sense, particularly for investors in high-tax states. Further, structured products may provide the opportunity to exchange upside participation for protection and coupon payments.

Finding growth in a low-growth world

We believe the global economy will continue to slow. With growth scarce, sectors that are demonstrating the ability to grow should demand a premium. Technology and Healthcare are benefiting from secular trends (not dependent on seasonality or economic trends), and there are also several specific industries and themes that could provide above-market growth, such as cloud computing and software, 5G, data privacy and gene therapy.

graph showing what has changed from the second half of 2018 to the first half of 2019

Source: J.P. Morgan, Bloomberg, “Then” data as of second half of 2018. “Now” data as of first half of 2019.


No outlook is without its risks. We are watching the following areas:

The Fed’s decision to pause breathed new life into markets and likely extended the cycle. But the cycle has not been reset, so investors should take a prudent approach to risk. While we see the potential for more upside, the risks are greater. Adding protection and focusing on yield are important, while the timeless strategy of diversification is all the more critical.

None of this caution precludes us from finding growth trends of the future. Technology and Healthcare are two key areas where we see substantial growth potential that is not currently factored into markets.

Finally, by shifting portfolios toward quality, liquidity, yield and secular growth, we can be prepared for greater uncertainty ahead. In portfolios that we manage, we have been making changes like this to ensure that we can be more comfortable staying invested and helping clients move toward achieving their goals.

The views and opinions expressed in this material are those of the featured J.P. Morgan Chase & Co. (“J.P. Morgan”) employee and do not necessarily reflect the policies or positions of JPMorgan Chase & Co. The material is provided for informational purposes only and is designed to provide general market commentary. It does not constitute J.P. Morgan research nor should it be considered a recommendation of a particular investment strategy or an offer or solicitation for the purchase or sale of any financial instrument. Opinions and estimates offered constitute the featured J.P. Morgan employee’s judgment as of the date of this material and are subject to change without notice as are statements of financial market trends, which are based on current market conditions. J.P. Morgan believes the information provided here is reliable, but do not warrant its accuracy or completeness. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation for any particular action.

Investing involves market risk, including the possible loss of principal. Investments in international or emerging markets can be more volatile and involve a greater degree of risk. Not all investments or strategies are suitable for all investors and there is no guarantee that a particular investment objective will be achieved. You should speak to your financial advisor before making any investment decisions.

Investing involves market risk, including the possible loss of principal. Investments in international or emerging markets can be more volatile and involve a greater degree of risk. Not all investments or strategies are suitable for all investors and there is no guarantee that a particular investment objective will be achieved. You should speak to your financial advisor before making any investment decisions.

The price of equity securities may rise or fall due to the changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. Equity securities are subject to “stock market risk” meaning that stock prices in general may decline over short or extended periods of time.

In general, the bond market is volatile, bond prices rise when interest rates fall and vice versa. Longer term securities are more prone to price fluctuation than shorter term securities. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss. Dependable income is subject to the credit risk of the issuer of the bond. If an issuer defaults no future income payments will be made.

Past performance is not a guarantee of future results. Diversification/asset allocation does not ensure a profit or protect against a loss.

J.P. Morgan and its affiliates do not provide legal, tax or account advice so you should seek professional guidance if you have questions.

Investment products and services are offered through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment advisor, member of FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMS, CIA and JPMorgan Chase Bank, N.A. are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.

© 2019 JPMorgan Chase & Co.


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