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JP Morgan 1655406568
JP Morgan 1655406568
Outlook 2022
Hurricane or storm clouds:
A world in transition
Table of contents
Introduction
4 Investing through the cycle
Conclusion
20 Discipline through discomfort
1
Introduction
INVESTMENT PRODUCTS: • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
The views expressed herein are based on current conditions, subject to change and may differ from other JPMorgan Chase & Co. affiliates and employees. The views and
strategies may not be appropriate for all investors. Investors should speak to their financial representatives before engaging in any investment product or strategy. This
material should not be regarded as research or as a J.P. Morgan Research Report. Outlooks and past performance are not reliable indicators of future results. Please read
additional regulatory status, disclosures, disclaimers, risks and other important information at the end of this material.
Investing
through
the cycle
Heading into this year, many
investors were prepared for a vibrant
economic cycle. Now, the outlook
is more challenged, with investors
asking if there are storm clouds
or an economic hurricane on the
horizon. The tailwinds from healthy
consumers and corporations, as well
as innovation remain in place. But
the business cycle has progressed
at a historically fast pace, while
monetary and fiscal policy are no
longer adding support.
INTRODUCTION
In our mid-year outlook, we cast our eye on a world in Bond yields have soared, leading to the worst year-to-date
transition and consider what it means for investors, for this performance for sovereign and investment-grade corporate
business cycle and the next. The transitions we observe are debt on record. Global equity markets have also declined, and
connected to three drivers that may determine the trajectory the S&P 500 has had one of the worst year-to-date starts on
of the global economy and financial markets in the second record as well. The most speculative assets—the pandemic-
half of the year. They are: the end of the era of easy money era darlings that thrived when rates were close to zero—are
and the shift to tighter monetary policy; the ongoing ripple some of the worst performers this year.
effects of Russia’s invasion of Ukraine; and finally, China’s
shifting role in the global economy. Will these risks swirl Finally, the U.S. dollar is near its strongest level versus major
together to form an economic hurricane, or are they merely trading partners in decades, which can be disruptive for
storm clouds due to pass? multinational corporations and for emerging market countries
that issue U.S. dollar-denominated debt.
Central banks’—particularly the Federal Reserve’s (Fed’s)
campaign against inflation—raise the most pressing issues U.S. BOND YIELDS HAVE SOARED TO CYCLE HIGHS
for investors. U.S. headline inflation, near its multi-decade Interest rate, %
3.5%
high, and a tight labor market necessitate tighter monetary
policy. But the pandemic’s lingering economic impacts make 3.0
10-year yield
2-year yield
it difficult to decipher how much tightening is necessary. Fed funds rate
2.5
The economic impact of Russia’s invasion of Ukraine will likely
be most acute in Europe, given the continent’s dependence 2.0
Undoubtedly, recession risks have risen. But at this point, a Year-to-date, multi-asset investors have had little opportunity
recession over the next 12 months is not our base case. to hide. Going forward, entry points look much more
attractive, and we expect the inverse correlation between
For their part, markets have already begun to reflect an stocks and bonds to revive. Put another way, we expect bonds
environment characterized by the end of easy money, to again serve as portfolio insulators from equity volatility.
slowing economic growth and higher risks.
Campaign against
inflation and the
end of easy money
The Fed’s campaign against inflation has been the dominant
driver of global financial markets so far this year. Headline
inflation, which touched a 40-year high, coupled with a tight
labor market give the Fed justification to aggressively raise
policy rates. Over the next 12 months, the market is pricing
in the fastest hiking cycle since the 1990s. What’s more, the
Fed is embarking on a path to shrink its USD 9 trillion balance
sheet to under USD 7 trillion by 2025 (if all goes well). Higher
rates and less central bank liquidity—the end of easy money—
aim to tighten financial conditions. The question becomes,
how much tightening is enough, but not too much?
The unemployment rate has plunged to 3.6%, clear evidence U.S. NATIONAL AVERAGE 30-YEAR FIXED MORTGAGE RATE, %
of a tight labor market. However, the unemployment rate 30-year fixed mortgage rate, %
is another statistic that merits a post-pandemic asterisk.
6.5%
Lingering pandemic-era distortions can also be seen in
the labor data. Since the start of the year, over 1.2 million
Americans have re-entered the work force amid waning 5.5 5-year moving average
concerns about COVID-19. As a result, wage inflation has
decelerated to a pace just above the 2018–2019 period. 4.5
2.4%
Average hourly earnings
Employment Cost Index 2.5
2.0 ’03 ’06 ’09 ’12 ’15 ’18 ’21
Source: Bloomberg Finance L.P. Data as of May 1, 2022.
1.6
1.2 As we move into the second half of the year, we will start
0.8
to see more signs that this rate-hiking cycle is accelerating
an economic slowdown that was set to happen naturally as
0.4 the pandemic receded. Our base case is a soft or “soft-ish”
0.0 landing. But as we’ve noted, recession risks have clearly risen.
'15 '16 '17 '18 '19 '20 '21 '22 Raising rates enough, but not too much—it’s a tricky balancing
Source: Bureau of Labor Statistics, Haver Analytics. Data as of April 2022. act that has historically eluded central banks.
300
Although the Fed has only just begun its hiking cycle, we 280
are already seeing the desired impact of slowing economic
260
activity. The housing market, the U.S. economy’s most
240
interest-rate-sensitive sector, is slowing. Over the last
six months, mortgage rates surged to the highest level 220
since 2009, housing affordability plunged, and mortgage 200
applications slowed.
180
’16 ’17 ’18 ’19 ’20 ’21 ’22
Sources: Mortgage Bankers Association, Haver Analytics. Data as of April 29, 2022.
and commodity
events. History shows that underlying economic forces tend
to influence markets more than specific geopolitical events.
supply shocks
However, when there is a direct link between the event and
the global economy, we need to be aware of the potential
impacts it could have on investment portfolios.
Russia’s invasion of Ukraine has In the case of Russia’s invasion of Ukraine, the link—energy—
is clear. Global benchmarks for crude oil are trading near
a tragic cost in human suffering their highest levels over the last decade, and U.S. retail
and poses significant challenges gasoline prices spiked to record highs this spring. Investors
are increasingly worried that volatility in both energy and
to the global economy. agricultural commodities could lead to turbulence and destroy
demand as consumers forgo other spending to ensure access
to necessities.
23%
20
10 9%
<3%
0
Natural gas imports* Oil imports**
Sources: EIA, Haver Analytics, BP Statistical Review of World Energy. *Data as of December
2020. **Data as of November 2021. Oil imports include crude oil and petroleum products.
By any measure, Europe’s economy faces a very disruptive An ECB on the move marks a watershed moment for global
supply shock. Many European governments have introduced fixed income investors. After the central bank cut rates into
fiscal schemes to try and shield consumers from the full negative territory in 2014, a USD 18 trillion glacier of negative
impact of higher energy costs, but spending growth is set to yielding debt amassed in global financial markets. As rates
decline. We estimate that higher energy prices will lead to have moved higher this year, that glacier has melted from its
about a 30% larger hit to overall growth in Europe than in the peak in 2021 to a mere USD 2.5 trillion. The era of negative
United States. yielding debt may be coming to an end, at least for now, and
Euro-based investors finally have the opportunity to add yield
to portfolios.
GOVERNMENT SPENDING MEASURES ANNOUNCED IN RESPONSE
TO SPIKING ENERGY PRICES
% of GDP
NEGATIVE YIELDING DEBT HAS MELTED AWAY
1.2% % of Bloomberg Global Agg Index with negative yield
30%
1.0
0.8 25
0.6 20
0.4 15
0.2 10
0.0 5
Italy Germany France United Spain Netherlands
Kingdom
0
Sources: National governments, OECD, UBS, J.P. Morgan CIB. Spending measures are ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’21 ’22
estimates and inclusive of pre- and post-invasion announcements starting in June 2021 and
running through April 2022. Figures could be higher by year-end. Source: Bloomberg Finance L.P. Data as of April 29, 2022.
This complicates the European Central Bank’s (ECB’s) plan to While the outlook for the broader European economy appears
raise rates for the first time in eight years, but the ECB seems challenged over the near term, equity investors should
resolute. Raising interest rates while a supply shock is already consider that European stocks are down meaningfully from
squeezing real incomes could lead to a sharp downturn. their highs and trade at a historically wide, 30%, discount to
U.S. equities. This suggests that a good degree of risk is already
reflected in the price.
COVID-19 in
China and the
global fallout
Chinese policymakers have clearly signaled that they want to Exports now drive China’s economy. Booming demand for
discourage speculation in the housing and real estate sectors durable goods in developed economies (especially in the United
to reduce leverage in the broader economy. States) over the last two years led to strong manufacturing and
export activity. The problem is that global demand for durable
This has led to declines in building sales, new construction goods is likely to fade, given consumer saturation and the Fed’s
activity and home prices for the first time since the 2014–2015 tightening cycle.
slowdown (which was marked by a currency devaluation and
capital flight that spooked global investors). Global investors would probably welcome increased credit
issuance and meaningful policy easing to support growth.
LOCKDOWNS IN CHINA ARE POSING A THREAT TO ECONOMIC However, we aren’t counting on it because we think it is
ACTIVITY unlikely that the People’s Bank of China would move in such
China’s Economic Activity Index,* Q4 2018 = 100
125
opposition to developed economy central banks.
That said, the end of easy money marks a watershed moment for
the COVID-19 business cycle, one characterized by slower economic
and corporate earnings growth, and lower inflation globally.
Recession risk is elevated. We think investors can take three steps
to prepare goal-aligned portfolios to potentially weather this
cycle and next:
Rely on core growth and demographics) all argue against a material further
rise in interest rates.
their fundamental ranges during central bank 16% 15% U.S. aggregate bonds
tightening cycles.
12
12% U.S. municipal bonds
equity portfolios
good partners to investors.
10%
4x 0.5%
We believe all have a place in equity portfolios. And for 5%
this reason, healthcare, industrials and technology are 0x 0.0% 0%
Dividend Market Dividend Market Dividend Market
our three favorite equity sectors. Growth Growth Growth
Source: Morningstar. Dividend Growth represented by the Morningstar U.S. Dividend Growth
Mature healthcare companies seem particularly Index and market represented by the S&P 500. Data as of May 31, 2022.
7%
6%
5%
4.75%
3%
2%
’09 ’11 ’13 ’15 ’17 ’19 ’21 ’22
Source: Bloomberg Finance L.P. Data as of June 6, 2022. Note: The 60/40 allocation is composed of the S&P 500 and U.S.
Bloomberg Agg Index.
We believe long-term investors will be rewarded for enduring the volatility that
will likely define markets over the remainder of the year.
Russell Budnick
Global Head of Cross Asset Trading
Nur Cristiani
Head of LatAm Investment Strategy
Tom Kennedy
Chief Investment Strategist
Jacob Manoukian
Head of U.S. Investment Strategy
Grace Peters
Head of EMEA Investment Strategy
Xavier Vegas
Global Head of Credit Strategy
Alex Wolf
Head of Asia Investment Strategy
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