Investing
Markets rebound despite the ongoing recession obsession
While recession fears dominate headlines, the stock market continues to rally – but is it sustainable?
Our Top Market Takeaways for August 5, 2022
Market Update: Recession obsession
Google Trends suggests that this summer, people are searching for “recession” more often than they did even during the spring of 2020 and the Global Financial Crisis. The Treasury market seems to be reflecting recession fears. Despite a rise in yields this week, the yield curve remains inverted with the 2-year yield roughly 40bps higher than the 10-year yield.
The stock market doesn’t seem too fussed, though. Through Thursday, the S&P 500 was continuing its rally and is now about +13% higher than its June 16 bear market low. Tech-y index stalwarts like Apple, Amazon, and Microsoft have led the pack, helping the NASDAQ-100 finish Thursday at its highest level since early May.
As we mused in last week’s note, the simultaneous recession obsession and risk asset rally may seem like a head scratcher at first…but this week wasn’t without new reasons to be more hopeful about the path ahead.
Freddie Mac’s survey of home lenders showed that national average 30-year mortgage rates fell to 4.99%, down -31bps versus last week and -82bps versus the high at the end of June. Barrels of WTI crude oil are back below $90 for the first time since the invasion of Ukraine, helping coax the national average cost at the gasoline pump down to about $4.14/gallon versus over $5/gallon in mid-June. The labor market remains remarkably resilient, with Friday’s employment data showing that the economy added 528k jobs in July – more than double the number expected.
On the other hand, the strong jobs report also showed a pickup in wage growth on the month (to 0.5%, up from 0.4% in June), reminding investors that some inflationary pressures remain stubbornly strong. To boot, we still expect more signs of a broadening economic slowdown from here.
That said, maybe we’re at the point where investors en masse have accepted inflation and growth risks and are starting to look beyond the slump. Or, maybe the recent rally is nothing more than a FOMO-fueled false start.
Spotlight: Bear market rally or bottom?
While the +13% midsummer stock market rally from the lows has been a welcome reprieve, we caution investors not to let their guards down. The definition of a “bear market rally” is nebulous, but for comparison to today’s price action, we’ve decided historical instances should meet all of the following criteria:
- Must follow a drawdown of at least 20% from the market’s previous all-time high.
- Must be a gain of 10% or more from the bear market’s prior low.
- Must be followed by another decline that represents a new low for the selloff (i.e., not be the first leg in the market’s recovery back to all-time highs).
According to those parameters, we found that five of the six major selloffs since the ‘70s had at least one relief rally of more than 10% before dropping again to make fresh lows (2020’s lightning-quick selloff was the exception). The Global Financial Crisis and Tech Bubble each had three; the late ‘80s bear market – which was not accompanied by a recession – had one.
The point is, intra-selloff rallies can and have happened. While we’re not insisting that the S&P 500 will have to retest the 3,666 lows hit in June, we’re not convinced that a sustainable upside path for stocks has gotten any easier at the current juncture. Inflation is still untenably high, the Fed is keeping its policy options open, and earnings expectations just started getting revised lower.
The high yield bond market is telling a similar story. Over the past month, credit spreads have tightened by more than 100bps amid the risk-on shift. That said, over the past six months, new issuance of high yield bonds has slowed to ~1% of the overall market size. Since the Global Financial Crisis, past instances of issuance this light typically foretold a swing higher in defaults (the median one-year forward default rate was 4.2%; two-years forward it was 8.6%).
With defaults still below 1% today, we read that as a signal that credit spreads are likely to widen from here – even if we manage to avoid recession.
Whether historical bear markets were ultimately associated with a U.S. recession may not offer conclusive evidence about the durability of a rally off the lows, but it has seemed to have implications for both the magnitude of the market selloff at its worst and the duration of the slump.
Before this one, we’ve seen a total of 12 bear markets since the end of World War II, nine of which occurred around recessions. The recession bear markets saw an average decline of -36% and peak-to-recovery duration of roughly three and half years. That contrasts to non-recession bear markets’ average peak-to-trough decline of -28% and duration of about one and a half years.
If a recession does come to fruition, we think it is likely to be less severe than those in recent memory given strong consumer and corporate balance sheets and a still-resilient labor market. Regardless, the probability of a U.S. recession occurring in the next year – even if a mild one – is admittedly tough to handicap right now. Rough odds, we would call it a coin flip.
Investment Implications: Conviction is a rare commodity
The bottom line: The macroeconomic backdrop is still rife with uncertainty, and the potential for risk assets to re-test their prior lows leaves us with a preference for more defensive exposures. This rally may be a good opportunity to reposition into less risky exposures, some of which may now offer potential returns sufficient enough to stay on track towards financial goals.
For example, earlier this week, our Chief Investment Office trimmed equity overweights in exchange for more exposure to core bond duration in the multi-asset portfolios they manage. Still, we think a modest equity overweight is warranted, given that today’s economic conditions and markets are moving faster than what is historically typical. In our view, the stock market is likely to be higher than it is today one to two years from now, even in the event of recession.
Beyond core portfolios, we’re still seeing tactical opportunities, like putting volatility on our side to add equity exposure with downside protection via structured notes. For more opportunistic investors keen on leaning into risk, we think asset classes like preferreds and hybrids may be a good first step to do so right now.
Conviction may be a rare commodity in today’s investment environment, but we have it when it comes to our recommendations on portfolio positioning.
All market data from Bloomberg Finance L.P., 8/4/22.
All market and economic data as of August 5, 2022 and sourced from Bloomberg and FactSet unless otherwise stated.
Preferred investments share characteristics of both stocks and bonds. Preferred securities are typically long dated securities with call protection that fall in between debt and equity in the capital structure. Preferred securities carry various risks and considerations which include: concentration risk; interest rate risk; lower credit ratings than individual bonds; a lower claim to assets than a firm's individual bonds; higher yields due to these risk characteristics; and “callable” implications meaning the issuing company may redeem the stock at a certain price after a certain date.
Investing in Structured Notes involves a number of significant risks. You should analyze the Structured Notes based on your individual circumstances, taking into account such factors as investment objectives, tolerance for risk, and liquidity needs.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
RISK CONSIDERATIONS
- Past performance is not indicative of future results. You may not invest directly in an index.
- The prices and rates of return are indicative, as they may vary over time based on market conditions.
- Additional risk considerations exist for all strategies.
- The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
- Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
IMPORTANT INFORMATION
All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.
Bonds are subject to interest rate risk, credit and default risk of the issuer. Bond prices generally fall when interest rates rise. Investing in fixed income products is subject to certain risks, including interest rate, credit, inflation, call, prepayment and reinvestment risk. Any fixed income security sold or redeemed prior to maturity may be subject to substantial gain or loss.
All market and economic data as of July 2022 and sourced from Bloomberg and FactSet unless otherwise stated.
The information presented is not intended to be making value judgments on the preferred outcome of any government decision.
This material is for information purposes only, and may inform you of certain products and services offered by private banking businesses of JPMorgan Chase & Co. (“JPM”). Products and services described, as well as associated fees, charges and interest rates, are subject to change in accordance with the applicable account agreements and may differ among geographic locations. Not all products and services are offered at all locations. If you are a person with a disability and need additional support accessing this material, please contact your J.P. Morgan team or email us at accessibility.support@jpmorgan.com for assistance. Please read all Important Information.
- The MSCI China Index captures large- and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). With 459 constituents, the index covers about 85% of this China equity universe. Currently, the index also includes Large Cap A shares represented at 5% of their free float adjusted market capitalization.
- The Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.
- The STOXX Europe 600 Index tracks 600 publicly traded companies based in one of 18 EU countries. The index includes small-cap, medium-cap and large-cap companies. The countries represented in the index are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Holland, Iceland, Ireland, Italy, Luxembourg, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
GENERAL RISKS & CONSIDERATIONS. Any views, strategies or products discussed in this material may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this material should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g. equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan team.
NON-RELIANCE. Certain information contained in this material is believed to be reliable; however, JPM does not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. No representation or warranty should be made with regard to any computations, graphs, tables, diagrams or commentary in this material, which are provided for illustration/reference purposes only. The views, opinions, estimates and strategies expressed in this material constitute our judgment based on current market conditions and are subject to change without notice. JPM assumes no duty to update any information in this material in the event that such information changes. Views, opinions, estimates and strategies expressed herein may differ from those expressed by other areas of JPM, views expressed for other purposes or in other contexts, and this material should not be regarded as a research report. Any projected results and risks are based solely on hypothetical examples cited, and actual results and risks will vary depending on specific circumstances. Forward-looking statements should not be considered as guarantees or predictions of future events.
Nothing in this document shall be construed as giving rise to any duty of care owed to, or advisory relationship with, you or any third party. Nothing in this document shall be regarded as an offer, solicitation, recommendation or advice (whether financial, accounting, legal, tax or other) given by J.P. Morgan and/or its officers or employees, irrespective of whether or not such communication was given at your request. J.P. Morgan and its affiliates and employees do not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transactions.
IMPORTANT INFORMATION ABOUT YOUR INVESTMENTS AND POTENTIAL CONFLICTS OF INTEREST
Conflicts of interest will arise whenever JPMorgan Chase Bank, N.A. or any of its affiliates (together, “J.P. Morgan”) have an actual or perceived economic or other incentive in its management of our clients’ portfolios to act in a way that benefits J.P. Morgan. Conflicts will result, for example (to the extent the following activities are permitted in your account): (1) when J.P. Morgan invests in an investment product, such as a mutual fund, structured product, separately managed account or hedge fund issued or managed by JPMorgan Chase Bank, N.A. or an affiliate, such as J.P. Morgan Investment Management Inc.; (2) when a J.P. Morgan entity obtains services, including trade execution and trade clearing, from an affiliate; (3) when J.P. Morgan receives payment as a result of purchasing an investment product for a client’s account; or (4) when J.P. Morgan receives payment for providing services (including shareholder servicing, recordkeeping or custody) with respect to investment products purchased for a client’s portfolio. Other conflicts will result because of relationships that J.P. Morgan has with other clients or when J.P. Morgan acts for its own account.
Investment strategies are selected from both J.P. Morgan and third-party asset managers and are subject to a review process by our manager research teams. From this pool of strategies, our portfolio construction teams select those strategies we believe fit our asset allocation goals and forward-looking views in order to meet the portfolio’s investment objective.
As a general matter, we prefer J.P. Morgan managed strategies. We expect the proportion of J.P. Morgan managed strategies will be high (in fact, up to 100 percent) in strategies such as, for example, cash and high-quality fixed income, subject to applicable law and any account-specific considerations.
While our internally managed strategies generally align well with our forward-looking views, and we are familiar with the investment processes as well as the risk and compliance philosophy of the firm, it is important to note that J.P. Morgan receives more overall fees when internally managed strategies are included. We offer the option of choosing to exclude J.P. Morgan managed strategies (other than cash and liquidity products) in certain portfolios.
The Six Circles Funds are U.S.-registered mutual funds managed by J.P. Morgan and sub-advised by third parties. Although considered internally managed strategies, JPMC does not retain a fee for fund management or other fund services.
LEGAL ENTITY, BRAND & REGULATORY INFORMATION
In the United States, bank deposit accounts and related services, such as checking, savings and bank lending, are offered by JPMorgan Chase Bank, N.A. Member FDIC.
JPMorgan Chase Bank, N.A. and its affiliates (collectively “JPMCB”) offer investment products, which may include bank-managed investment accounts and custody, as part of its trust and fiduciary services. Other investment products and services, such as brokerage and advisory accounts, are offered through J.P. Morgan Securities LLC (“JPMS”), a 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. JPMCB, JPMS and CIA are affiliated companies under the common control of JPM. Products not available in all states.
© 2022 JPMorgan Chase & Co. All rights reserved.
