We no longer support this browser. Using a supported browser will provide a better experience.

Please update your browser.

Close browser message

Investing

So, are we in a recession?

Markets are rallying despite GDP contracting and higher rates on the horizon. What gives?


Our Top Market Takeaways for July 29, 2022

Markets in a Minute: Well, technically…

A day after the Federal Reserve raised its policy interest rate by another 75 basis points, the data for U.S. GDP from the second quarter showed that the economy contracted again.

Let’s start with the big debate: should we characterize the current economic environment as a recession? The simple case for is that GDP growth has been negative for two quarters in a row. Technically, that’s a technical recession.

But we think the focus on the recession debate could be distracting investors from the more important signals that came from the GDP release and the Fed’s meeting on Wednesday.

The first takeaway is that rate hikes are having their intended impact. The economy is slowing, and quickly. The housing and goods sectors are going through a substantial slowdown. Together, they dragged 2nd quarter GDP down by ~1.8%. All of the other major housing related economic data released this week came in below economist estimates, and companies from Weber Grills to Stanley Black & Decker reported ugly quarterly earnings reports.

The second is that we are probably closer to the end of the Fed’s rate hiking cycle than the beginning. The Fed acknowledged this backdrop of slowing growth in their policy statement. And while their primary focus is still on getting inflation back to target, in the press conference they hinted that the worst of the tightening cycle is probably over. Two ideas help support this view.

The first is that the Fed thinks they are close to “neutral” or the theoretical interest rate that neither stimulates nor restricts economic activity. This is important because a guiding principle for this tightening cycle has been to get to neutral as quickly as possible.

Next, Powell said that it would probably be appropriate to slow the pace of rate increases once they get into restrictive territory. Because their next move will get them into restrictive territory, it follows that smaller rate hikes are likely going forward. This aggressive rate hiking cycle has been the primary reason for the poor performance from both equities and bonds so far this year, so smaller rate hikes should be welcomed by investors.

Instead of getting distracted by the “recession” debate1, the weak GDP report and the Fed’s meeting give us added confidence in our view that the deteriorating growth backdrop and falling inflation will enable the Fed to stop raising interest rates early in 2023.

In markets, that means a sigh of relief, recession or not.      

Spotlight: Rally on, Wayne

For both equity and bond markets, it doesn’t really seem like anything has gotten better. Europe is still facing an energy supply crisis, inflation hasn’t abated, growth is slowing dramatically, the Fed is still hiking aggressively, the housing market is rolling over, and consumer sentiment is in shambles.

But something must be changing.

Broad equity markets have rallied by ~11% from their early June lows, 10-year bond yields are down over 80 bps from their year to date highs, and the Bloomberg Aggregate Bond Index has rallied by over 5% from this year’s lows. 

Back in May, we laid out the potential criteria for a bottoming market: [1] a peak in inflation, [2]  a change in tone from the Fed, and [3] at least avoiding the worst case outcomes in Europe and China.

On [1]  the news on inflation has actually improved despite June’s scorching CPI report. Crude oil, like bond yields, peaked on June 14th. Coincidence? Probably not.

Way back then, it seemed like spiraling gasoline prices would force the Fed to raise interest rates even more aggressively to help contain inflation expectations. Instead, crude prices dropped 21% and took off some of the inflationary heat. Further, retailer earnings reports have consistently shown increasing inventories and an appetite for markdowns to clear them. Inflation has been stubborn, but it is looking more likely that it has indeed peaked.

On [2], the Fed’s press conference confirmed what the market may have been suspecting: that the Fed wasn’t going to hike by 75 bps at a time forever. The expectation from here is that we get a slower pace of rate hikes in the fall. As a result, 2 year treasury yields have dropped from their high of ~3.5% to ~2.85%.

And on [3], the situation on the ground in both Europe and China is still fluid, but it doesn’t seem like it is getting materially worse. In a year when markets are bruised, sometimes a break in the bad news counts as good news. 

Under the surface, it is also notable that markets are rallying on what would have been characterized as “bad” news. On the day that the Fed hiked by 75 bps, the long-duration secular growth stocks like those that are in the Nasdaq 100 rallied by 2.5%. The index extended its gains after Amazon and Apple posted strong earnings and is now at the highest level in 2 months.

On the day that the GDP release confirmed a technical recession and material weakness in the housing sector, housing equities actually rallied by over 2% and are now ~20% above their lowest levels of the year. On the single stock level, O’Reilly, the auto parts dealer, missed their earnings estimates and cut their full year earnings forecast yesterday, but the stock still managed to gain 2.5%.  

We don’t know whether or not the bottom is in, but there have been enough glimmers of hope on the inflation and Fed tightening front, and so much damage already done to markets, that even a modest change towards better news can mean gains for markets.

Investment Takeaways: Focus on conviction

While equity markets are staging a welcome relief rally, we don’t have a high degree of confidence in the near term direction of travel. That is why we are focused more on areas where we feel better about the potential upside and downside. Core fixed income and preferred equities could provide the appropriate profile.

  • Consider core fixed income as a portfolio ballast. Bond yields have fallen substantially over the last month given the reasons we laid out above, but if the economy does enter a (real) recession, then we think that interest rates have much further to fall. Even after the bond market rally, we would still advocate adding to the asset class.
  • Look for pockets of opportunities in risk assets. Dislocations provide opportunity. Preferred equities have been at the center of this year’s dislocation because they contain both bond- and equity-like characteristics. We think at current price and yield levels, there could be a compelling opportunity for “equity-like” returns while maintaining an added layer of protection because you are higher in the capital structure. Even after the rally, it is our preferred risk asset at the moment.

For more on how these considerations fit into your overall plan, please reach out to your J.P. Morgan Advisor.

1. Even if you do think we are in a recession (we don’t), you’d have to admit that it is a pretty bizarre one. Over the two quarters that headline GDP was negative, the economy added 2.7 million jobs, the unemployment rate fell from 3.9% to 3.6%, the travel sector strained under excess demand, and consumer debt delinquency rates hovered near all-time lows.


All market and economic data as of July 29, 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.

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.


Check the background of Our Firm and Investment Professionals on FINRA's BrokerCheck

To learn more about J. P. Morgan’s investment business, including our accounts, products and services, as well as our relationship with you, please review our  J.P. Morgan Securities LLC Form CRS and  Guide to Investment Services and Brokerage Products.

This website is for informational purposes only, and not an offer, recommendation or solicitation of any product, strategy service or transaction. Any views, strategies or products discussed on this site may not be appropriate or suitable for all individuals and are subject to risks. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor's own situation. 

This website provides information about the brokerage and investment advisory services provided by J.P. Morgan Securities LLC (“JPMS”). When JPMS acts as a broker-dealer, a client's relationship with us and our duties to the client will be different in some important ways than a client's relationship with us and our duties to the client when we are acting as an investment advisor. A client should carefully read the agreements and disclosures received (including our Form ADV disclosure brochure, if and when applicable) in connection with our provision of services for important information about the capacity in which we will be acting.

INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED

Equal Housing Opportunity logo

J.P. Morgan Chase Bank N.A., Member FDIC Not a commitment to lend. All extensions of credit are subject to credit approval 

J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment advisor, member 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. Certain custody and other services are provided by JPMorgan Chase Bank, N.A. (JPMCB). JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.

Please read additional Important Information in conjunction with these pages.