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Our Top Market Takeaways for September 22, 2023

Market update: Higher for longer 

Heading into Friday, stocks are down and bond yields are surging. Both 2-year and 10-year Treasury yields are hovering around their highest levels since 2007, as central banks – from the Federal Reserve to the European Central Bank, to the Bank of England – have all signalled they plan to hold rates at high levels for some time.

Digging in, the Fed hit “pause” after 525 basis points worth of rate hikes over the last year-and-a-half. As policymakers refreshed their projections for the years ahead, they signalled one more hike could be in the cards for this year, and that there could be less cuts in 2024 and 2025 than they initially expected. While growth has held up well, and that’s a good thing, it has also meant that inflation has lingered. 

This chart shows the Fed funds rate with the FOMC median dot plot projections for June and September.

In all, we think the data still points to more reasons to be optimistic than not. Policymakers have made a lot of progress in quelling price pressures with minimal economic pain. But we do acknowledge that the list of risks to the outlook is long (from oil prices to strikes, to student loan payments, to a potential government shutdown, to a policy mistake of overtightening). This uncertainty has prompted many to sit in the safety of cash – especially when it sports a yield of over 5%. But is that really your best bet?

Spotlight: Should you stay stashed in cash?

As cash has grown more alluring, it’s looked all the more difficult for other assets to beat it.

Yet despite all the uncertainty – around banks, policy, growth, inflation, government debt and more – many other areas of the market have outperformed cash this year.

If you bought T-bills at the start of 2023, your return so far would be around +3.6%. That might not feel too bad for the safety cash has offered. But by comparison, global stocks have returned +13%, and 25 out of 48 country stock markets we track have also beaten cash. Even after the recent selloff, the S&P 500 is up +14%, and despite all the focus on mega-cap tech (the Magnificent 7 are up an eyepopping +84%), about half the companies in the index have also outshined cash’s return. U.S. high yield bonds are likewise up a more meaningful +6%.

This chart shows the percentage total returns in USD of various categories.

But have you missed it? With “higher for longer” rates now dialling up the pressure on both stocks and bonds, earning more than 5% to lend money to the U.S. government might feel even tougher to beat.

Cash has a purpose, and it can be a critical part of any investor’s plan. But looking forward, we are reminded it comes with a cost. Multi-asset portfolios are designed to navigate across a range of different scenarios.

Let’s say that we avoid a recession and achieve a “soft landing.”

In that scenario, riskier assets such as stocks should outperform. Almost all of the swings in markets this year have been at the behest of valuations, with sentiment oscillating around the headlines. But earnings growth is just getting started. The Q2 season was better than anticipated and also seems to have marked the worst of it. Looking forward, S&P 500 earnings expectations for the future are rising, not falling.

In the long term, this matters a lot: Over the last three decades, the S&P 500 has cumulatively returned over 1,700%; 99% of that return is due to earnings and dividends, and only 1% from changes in valuations.

Stocks are driven by earnings and dividends in the long run

For December 1993, the dividend contribution was 2.9%, the earnings contribution was -4.9%, and the valuation contribution was 5.66%.

And when it comes to beating cash, let’s say it keeps its juicy 5% yield over the long term (already a lofty assumption, given, at some point, central banks will start cutting rates). Let’s also assume global stocks earn 8.5% per year, in line with J.P. Morgan Asset Management Long-Term Capital. The difference may feel small today, given cash comes with a lot more certainty, but after five years, hiding out in cash would trail your equity return by more than 20%. After 10 years, it grows to an eyepopping ~60%. The power of compounding leads to big differences over time.

This chart shows the compounded returns of Cash and All-Country World Equities over the course of the next 10 years, assuming a 4.4% rate on Cash and 8.5% on the MSCI ACWI.

Or, maybe we do get that recession.

Different pockets of fixed income can help achieve different goals. Cash and money market funds may offer a yield boost for your day-to-day liquidity needs, but if your goal is income, taking a little bit more credit and duration risk with short-duration corporate bonds can offer an even more meaningful pickup in yield – and still help you to lock in elevated rates for longer.

And if we do face a meaningful or protracted growth slowdown, bonds offer stability and protection. Bonds tend to do well when equities don’t, and during the peak-to-trough of the Global Financial Crisis, U.S. core fixed income returned 7%, while T-bills only returned 2%. Timing the right entry point is hard, but it’s worth noting how much pain is already reflected in bond prices: Bloomberg’s Global Aggregate Bond Index closed at its lowest level of 2023 so far yesterday.

Or, let’s say inflation reaccelerates.

In a world where inflation hangs around even longer than already expected, or at worst reaccelerates and prompts another wave of central bank rate hikes, alternatives such as real assets can offer more protection – as well as access to long-term trends such as industrial policy and the energy transition.

Case in point: In 2022, while public markets sank, assets such as infrastructure offered ample protection. Moreover, with rates higher and lending standards getting tighter, direct lenders have been stepping in as banks have been more reticent to take on new loans. This has created a compelling environment for private credit.

This chart shows the 2022 returns in percentage terms of alternative assets as of December 31st, 2022.

So this is all to say a 60/40 portfolio of stocks and bonds remains one of the best starting points in our view, offering investors the potential for growth and income. But alternatives can add an additional element of diversification and help position for a world in transition.

Investment considerations: Cash doesn’t rally

Cash comes with an opportunity cost – by sitting in cash, investors may miss out on the potential upside stocks could see in a soft landing, lack the protection that bonds can offer if a recession does happen, and lose out on the inflation protection that real assets have.

We’ll echo what we said on this topic earlier this year: Take an opportunity to step back. Think again about how much liquidity you really need. If you have excess capital in cash and cash equivalents, we see a range of options across the risk spectrum that could potentially give you higher returns over the long run.

Your J.P. Morgan advisor can help you reassess how much cash you need and where excess capital might be deployed to reach your family’s goals.


All market data from FactSet and Bloomberg Finance L.P., 9/22/23.

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