Bull market to bear: a midway financial checkup

David Nolet, Managing Director and Fort Worth Market Manager, J.P. Morgan Private Bank (Photo by Neetish Basnet)

We’re now more than midway through 2022 and the post-COVID bull market has come to an end. We’re officially in bear territory.

Our outlook is more challenged than we expected at the start of the year due to the Fed’s tightening campaign, the war in Ukraine, and rising COVID-19 cases in China. This article will examine a world in transition and the drivers that will set the trajectory of the global economy and financial markets.

The campaign against inflation and the end of easy money
The most pressing issue for investors centers around the campaign against inflation by central banks – particularly the Federal Reserve. U.S. inflation is at its multi-decade high, and a tight labor market necessitates tighter monetary policy. But the pandemic’s lingering economic impact makes it difficult to decipher how much tightening from the Fed will be necessary.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?

There is growing evidence of excess supply in the trucking industry, and global shipping rates are rolling over. Used car prices have also begun to fall. These developments suggest that at least a portion of the inflation we have seen over the last 18 months was related to COVID-19 and may partially normalize as the pandemic wanes.

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Additionally, the housing market is slowing with mortgage applications dropping lower. As we move into the second half of the year, we will start to see more signs that this rate-hiking cycle is accelerating an economic slowdown that was set to happen naturally as the pandemic era stimulus receded.

Recession risks have clearly risen. Raising rates enough, but not too much – it’s a tricky balancing act that has historically eluded central banks.

War in Europe and commodity supply shocks
Generally, we don’t think investors should make meaningful changes to investment portfolios based solely on geopolitical events. History shows that underlying economic forces tend to influence markets more than specific geopolitical events. 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. In the case of Russia’s invasion of Ukraine, the link – energy – is clear.

Europe’s dependence on Russian energy will be felt globally, but most intensely on the continent itself. Economic momentum is already slowing and the risk of a Russian energy embargo is elevated from pre-war levels.

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Global benchmarks for crude oil are trading near their highest levels over the last decade, and U.S. retail gasoline prices have recently spiked to record highs before receding over the last month. Investors are increasingly worried that volatility in both energy and agricultural commodities could lead to turbulence and destroy demand as consumers forgo other spending to ensure access to necessities.

China’s management of COVID-19 and the resulting global fallout
In China, COVID-19 lockdowns curtailed consumer activity and the production of goods critical to global supply chains. Policymakers seem committed to Zero-COVID policies that increase risks to the global growth outlook.

Lockdowns are exacerbating economic weakness in China and pose a risk to global supply chains that are still stressed. Current lockdowns are easing locally. But limited acquired immunity means that future COVID-19 waves and lockdowns are likely, making it effectively impossible for consumers to drive any kind of above-trend economic growth.

Final Thoughts
Keeping in mind these drivers, investors can consider a few different approaches to stay invested and strengthen their portfolios.

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1. Using core fixed income as portfolio ballast
Due to low interest rates for the last two years, bonds have offered neither incremental yield nor useful portfolio protection. As rates have started to rise, investors are now finally getting paid an adequate return and getting portfolio protection should a recession occur.

2. Prioritizing balance and quality in equity portfolios
We expect trend-like earnings growth through the balance of the year. Across a variety of sectors we see opportunities with high-quality businesses that provide earnings stability and visibility. Healthcare, industrials and technology are our three favorite equity sectors.

3. Positioning for structural change
The next cycle will likely feature reconceived and restructured global supply chains with manufacturers bringing their factories onshore (or closer to shore) and making them more autonomous for efficiency. We also expect meaningful progress in the energy transition as well as a transformed real estate sector. Investors will have a large range of opportunities which they can align to their financial (and non-financial) goals and values across these sectors.

Still, we don’t underestimate the challenges of the global economy markets in transition. Neither do we underestimate the potential opportunities going forward. After all, investing through the cycle means investing for the next cycle.

David Nolet is a Managing Director and the Fort Worth, TX Market Manager at J.P. Morgan Private Bank. David oversees a team of bankers, investors, wealth strategists and financial specialists that deliver guidance across investing, philanthropy, family office management, credit, fiduciary services, advisory services and more. To learn more about David Nolet and the Private Bank in Texas, visit our website.
This article is sponsored content from J.P. Morgan Private Bank.


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