Investing
We expect this U.S. expansion to last for years. Here's why.
Consumer spending, boosts to productivity and an accommodative Fed may help keep the economy healthy.
We think there is still more sand left in the U.S. economic hourglass before this cycle runs out—and we suggest that investors use this time wisely.
More specifically: We believe the U.S. economy will likely be in a “mid-cycle” environment by the end of the year, and that this mid-cycle will be measured in years rather than quarters. It is almost impossible to know what the future holds, but given what we know now, we think it will be the middle of this decade before the economy enters a “late-cycle” phase.
All of this, we think, bodes well for investors in multi-asset portfolios. In prior work, we have shown that mid-cycle environments tend to be lucrative for equity investors, as earnings growth delivers price gains. Further, as longer-term interest rates rise, fixed income becomes a more compelling option for investors.
But, critically, active management becomes key when securities across asset classes are moved by drivers that are more sector- and company-specific. And as we move into mid-cycle, investing becomes more micro.
Where we believe we’re headed
To know where we’re headed, we first have to know where we are in the business cycle. While identifying where we are in the cycle is never an easy task, the pandemic adds greater complexity. COVID-19 restrictions have helped create a continuing boom in durable goods such as used cars and the housing sector, while depressing high-contact services such as live entertainment and commuting-related sectors.
Even though new variants of the coronavirus may continue to pose risks to the economy, investors are likely to shift their attention in the coming quarters from epidemiology to factors that traditionally drive the economy and markets. That is to say: Instead of COVID cases and hospitalization rates, we expect investors to focus on GDP growth, employment rates, monetary policy, earnings, etc.
Assessing where we are in the cycle
How long might the coming “mid-cycle” last? There are currently two major schools of thought. One posits that high inflation will force the Federal Reserve to raise rates to slow the economy as soon as next year (leading to a short mid-cycle). The other says the U.S. economy will repeat the slow and sluggish mid-cycle environment of the post–global financial crisis cycle that kept investor enthusiasm and interest rates in check.
We think the answer likely lies somewhere in between. Sufficient fiscal support coupled with productivity gains made during the crisis will drive a recovery that is more robust and shorter than the recovery from the global financial crisis. As a result, we believe, this mid-cycle environment will last into the mid-2020s.
A quicker, stronger recovery would be good news for multi-asset portfolios, as mid-cycles have a self-reinforcing dynamic of spending and income that generates healthy economic growth and solid returns for risk assets.
We see three factors that will help power the coming cycle:
- The consumer is set to spend
- Pandemic-era shifts could increase productivity and GDP
- The Federal Reserve has a more accommodative framework than it did in the past
The consumer is set to spend
There are reasons to believe that U.S. consumption will be strong. U.S. households have accumulated around $2.4 trillion in excess savings. Soaring home and stock prices also mean that wealth is generally at all-time highs. While the distribution of this wealth is skewed toward higher-income households, demand for labor and wage growth should spread the wealth, broadening the power to spend.
More money to spend
U.S. households saved an extra $2.4T during the pandemic
Consumers also have scope to increase their borrowing. Since 2015, debt has been growing at about half the rate of income. Meanwhile, home price appreciation has augmented household assets, suggesting greater borrowing power. Moreover, debt service as a percentage of income is at all-time lows, and lending standards are easing. As excess savings are spent down, leverage might rise to augment incomes and sustain spending.
Pandemic-era shifts could increase productivity and GDP
We see three big, pandemic-induced shifts that could help increase productivity and help sustain this cycle.
- More corporate spending—The surge in demand from fiscal support and increased savings could lead to higher levels of corporate capex. Goods-producing industries (most notably semiconductors) cannot keep up with demand and need to invest in more capacity. Companies in both goods and services industries are also likely to invest in automation.
U.S. companies’ investment in automation is likely to keep increasing
During the pandemic, software and information processing capex as a percentage of GDP shot up—but there is no reason so expect a drop-off anytime soon
- More work hours and workers—More remote work might mean employees will spend less time commuting and women will be better able to participate in the economy. The less time people spend on the trains and roads, the more hours they have to work and the more output they can produce. Remote work also permits a level of flexibility around childcare, a traditional stumbling block for female labor participation. Currently, women aged 25 to 44 years old have a participation rate that is around 12–15 percentage points lower than that of men. 1
- More home buying—Remote work, low interest rates and limited housing stock should support the housing sector. If commuting is not as onerous and mortgage rates keep housing affordable, millennials (who are moving into their middle ages and out of their parents’ homes) might buy houses for their growing families. The only problem is that there aren’t many dwellings available these days. The collapse of the housing sector during the global financial crisis led to more than a decade of underbuilding. Now, demand for homes outstrips supply. Meeting this need will help support the overall economy. The housing sector has a significant ripple effect on the broader economy. For every one housing sector job created, three to five jobs are created in other parts of the economy.
The Federal Reserve is more accommodative
The Federal Reserve is likely to take its time before slowing the economy down, especially as productivity gains could also help keep a lid on inflation.
Interest rates typically determine when the economic hourglass runs out of sand. Simply put: If interest rates are below expected returns, rational actors will borrow to invest in something that produces cash flows with the potential to exceed the cost of borrowing.
Toward the end of an economic cycle, the Fed tends to raise interest rates in an effort to slow the economy to keep inflation in check. Unfortunately, this move tends to raise the likelihood of recession.
The good news for investors is that the Fed has adopted a new framework called “Flexible Average Inflation Targeting” (FAIT) and a renewed emphasis on the labor market that will likely lead it to remain accommodative for longer than it was in prior cycles to ensure a robust labor market recovery that draws workers off the proverbial sidelines.
Investors are still deciphering what FAIT means in practice. In theory, it should to lead to a fed funds rate that is low enough to generate stronger growth and inflation outcomes than investors saw during the last cycle.
There’s a need for active management
Active management becomes more important during mid-cycle environments.
During early-cycle, rising tides raise all boats while the market as a whole benefits from broad-based economic recovery. But as the cycle ages into mid-cycle, broad growth slows, making themes and secular winners more important for outperformance.
For example, the NASDAQ emerged as a big winner in the mid-1990s, the energy sector began to outperform in the mid-2000s, and the FANG stocks (Facebook, Amazon, Netflix and Google, among others) began to outperform in the mid-2010s. It is here where active management historically has helped find the secular winners.
So speak with your J.P. Morgan team about how you might add active management to your portfolio.
IMPORTANT INFORMATION
KEY RISKS
This material is for informational purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part 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.
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 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 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 JPMorgan Chase & Co. Products not available in all states.
In Luxembourg, this material is issued by J.P. Morgan Bank Luxembourg S.A. (JPMBL), with registered office at European Bank and Business Centre, 6 route de Treves, L-2633, Senningerberg, Luxembourg. R.C.S Luxembourg B10.958. Authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg S.A. is authorized as a credit institution in accordance with the Law of 5th April 1993. In the United Kingdom, this material is issued by J.P. Morgan Bank Luxembourg S.A., London Branch, registered office at 25 Bank Street, Canary Wharf, London E14 5JP. Authorized and regulated by Commission de Surveillance du Secteur Financier and jointly supervised by the European Central Bank and the CSSF. Deemed authorized by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details of the Temporary Permissions Regime, which allows EEA-based firms to operate in the United Kingdom for a limited period while seeking full authorization, are available on the Financial Conduct Authority’s website. In Spain, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Sucursal en España, with registered office at Paseo de la Castellana, 31, 28046 Madrid, Spain. J.P. Morgan Bank Luxembourg S.A., Sucursal en España is registered under number 1516 within the administrative registry of the Bank of Spain and supervised by the Spanish Securities Market Commission (CNMV). In Germany, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Frankfurt Branch, registered office at Taunustor 1 (TaunusTurm), 60310 Frankfurt, Germany, jointly supervised by the Commission de Surveillance du Secteur Financier (CSSF) and the European Central Bank (ECB), and in certain areas also supervised by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). In Italy, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Milan Branch, registered office at Via Cordusio 3, 20123 Milano, Italy, and regulated by Bank of Italy and the Commissione Nazionale per le Società e la Borsa (CONSOB). In the Netherlands, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Amsterdam Branch, with registered office at World Trade Centre, Tower B, Strawinskylaan 1135, 1077 XX, Amsterdam, The Netherlands. J.P. Morgan Bank Luxembourg S.A., Amsterdam Branch is authorized and regulated by the Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF in Luxembourg; J.P. Morgan Bank Luxembourg S.A., Amsterdam Branch is also authorized and supervised by De Nederlandsche Bank (DNB) and the Autoriteit Financiële Markten (AFM) in the Netherlands. Registered with the Kamer van Koophandel as a branch of J.P. Morgan Bank Luxembourg S.A. under registration number 71651845. In Denmark, this material is distributed by J.P. Morgan Bank Luxembourg, Copenhagen Br, filial af J.P. Morgan Bank Luxembourg S.A. with registered office at Kalvebod Brygge 39-41, 1560 København V, Denmark. J.P. Morgan Bank Luxembourg, Copenhagen Br, filial af J.P. Morgan Bank Luxembourg S.A. is authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg, Copenhagen Br, filial af J.P. Morgan Bank Luxembourg S.A. is also subject to the supervision of Finanstilsynet (Danish FSA) and registered with Finanstilsynet as a branch of J.P. Morgan Bank Luxembourg S.A. under code 29009. In Sweden, this material is distributed by J.P. Morgan Bank Luxembourg S.A., Stockholm Bankfilial, with registered office at Hamngatan 15, Stockholm, 11147, Sweden. J.P. Morgan Bank Luxembourg S.A., Stockholm Bankfilial, is authorized and regulated by Commission de Surveillance du Secteur Financier (CSSF) and jointly supervised by the European Central Bank (ECB) and the CSSF. J.P. Morgan Bank Luxembourg S.A., Stockholm Bankfilial is also subject to the supervision of Finansinspektionen (Swedish FSA). Registered with Finansinspektionen as a branch of J.P. Morgan Bank Luxembourg S.A. In France, this material is distributed by JPMorgan Chase Bank, N.A. (“JPMCB”), Paris branch, which is regulated by the French banking authorities Autorité de Contrôle Prudentiel et de Résolution and Autorité des Marchés Financiers. In Switzerland, this material is distributed by J.P. Morgan (Suisse) S.A., which is regulated in Switzerland by the Swiss Financial Market Supervisory Authority (FINMA).
In Hong Kong, this material is distributed by JPMCB, Hong Kong branch. JPMCB, Hong Kong branch is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission of Hong Kong. In Hong Kong, we will cease to use your personal data for our marketing purposes without charge if you so request. In Singapore, this material is distributed by JPMCB, Singapore branch. JPMCB, Singapore branch is regulated by the Monetary Authority of Singapore. Dealing and advisory services and discretionary investment management services are provided to you by JPMCB, Hong Kong/Singapore branch (as notified to you). Banking and custody services are provided to you by JPMCB Singapore Branch. The contents of this document have not been reviewed by any regulatory authority in Hong Kong, Singapore or any other jurisdictions. You are advised to exercise caution in relation to this document. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. For materials which constitute product advertisement under the Securities and Futures Act and the Financial Advisers Act, this advertisement has not been reviewed by the Monetary Authority of Singapore. JPMorgan Chase Bank, N.A. is a national banking association chartered under the laws of the United States, and as a body corporate, its shareholder’s liability is limited.
With respect to countries in Latin America, the distribution of this material may be restricted in certain jurisdictions. We may offer and/or sell to you securities or other financial instruments which may not be registered under, and are not the subject of a public offering under, the securities or other financial regulatory laws of your home country. Such securities or instruments are offered and/or sold to you on a private basis only. Any communication by us to you regarding such securities or instruments, including without limitation the delivery of a prospectus, term sheet or other offering document, is not intended by us as an offer to sell or a solicitation of an offer to buy any securities or instruments in any jurisdiction in which such an offer or a solicitation is unlawful. Furthermore, such securities or instruments may be subject to certain regulatory and/or contractual restrictions on subsequent transfer by you, and you are solely responsible for ascertaining and complying with such restrictions. To the extent this content makes reference to a fund, the Fund may not be publicly offered in any Latin American country, without previous registration of such fund’s securities in compliance with the laws of the corresponding jurisdiction. Public offering of any security, including the shares of the Fund, without previous registration at Brazilian Securities and Exchange Commission—CVM is completely prohibited. Some products or services contained in the materials might not be currently provided by the Brazilian and Mexican platforms.
JPMorgan Chase Bank, N.A. (JPMCBNA) (ABN 43 074 112 011/AFS Licence No: 238367) is regulated by the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Material provided by JPMCBNA in Australia is to “wholesale clients” only. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Corporations Act 2001 (Cth). Please inform us if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
JPMS is a registered foreign company (overseas) (ARBN 109293610) incorporated in Delaware, U.S.A. Under Australian financial services licensing requirements, carrying on a financial services business in Australia requires a financial service provider, such as
J.P. Morgan Securities LLC (JPMS), to hold an Australian Financial Services Licence (AFSL), unless an exemption applies. JPMS is exempt from the requirement to hold an AFSL under the Corporations Act 2001 (Cth) (Act) in respect of financial services it provides to you, and is regulated by the SEC, FINRA and CFTC under U.S. laws, which differ from Australian laws. Material provided by JPMS in Australia is to “wholesale clients” only. The information provided in this material is not intended to be, and must not be, distributed or passed on, directly or indirectly, to any other class of persons in Australia. For the purposes of this paragraph the term “wholesale client” has the meaning given in section 761G of the Act. Please inform us immediately if you are not a Wholesale Client now or if you cease to be a Wholesale Client at any time in the future.
This material has not been prepared specifically for Australian investors. It:
- May contain references to dollar amounts which are not Australian dollars;
- May contain financial information which is not prepared in accordance with Australian law or practices;
- May not address risks associated with investment in foreign currency denominated investments; and
- Does not address Australian tax issues.
References to “J.P. Morgan” are to JPM, its subsidiaries and affiliates worldwide.
“J.P. Morgan Private Bank” is the brand name for the private banking business conducted by JPM.
This material is intended for your personal use and should not be circulated to or used by any other person, or duplicated for non-personal use, without our permission. If you have any questions or no longer wish to receive these communications, please contact your J.P. Morgan team.
© 2021 JPMorgan Chase & Co. All rights reserved.
