It Saw The Bull Market Coming: Here’s What JPMorgan Asset Management Sees Now

After a stock market rally that almost no one saw coming, the midyear outlooks from Wall Street’s biggest names have made for especially good reading. And it’s worth spending a little time with the one from JPMorgan Asset Management: it was among the few investment houses that anticipated this year’s surprising bull market. Here’s what it says about the economy for the rest of this year and where it sees opportunities now…

What’s the view from JPMorgan Asset Management?

First, rewind to last December: higher interest rates, slowing growth, and stubbornly high inflation had pretty much everyone expecting a rough year for markets. So JPMorgan Asset Management’s outlook for the year stood out among some of its more sour peers.

And it kind of nailed it. I mean, just read the headline on its 2023 outlook: “A Bad Year For The Economy, A Better Year For Markets”. Well said, JPAM.

But, while its optimistic view on stocks proved dead right, its gloomy view on the economy proved a bit too gloomy, at least so far. The service sector has actually held its own and the labor market is still pretty robust. That said, manufacturing is looking worrying, with demand weakening but input costs still higher (because of all that inflation).

So the midyear outlook from JPAM, which manages a staggeringly big $2.5 trillion in assets for its clients, offers a sobering reminder, once again predicting a mild recession, and blasting its new headline: “Too Good To Be True”.

The firm’s analysts note that the rally in stocks this year has been mainly driven by multiples expansion, as earnings have flatlined. And with valuations now even higher, they warned that markets just aren’t appropriately priced for a slowdown. Europe (not counting the UK) is the one major exception, where the rally has been fuelled by a combination of rising valuations and better earnings expectations, with the risks of an energy supply crunch having faded away.

Where are the opportunities then?

This team actually highlighted quite a few things you’ll want to think about when investing this year. So I’ve paired those with a few assets you might consider when doing so.

Quality. The analysts say their highest conviction is for quality stocks, and that’s a strong call: history suggests that a quality focus is at its best when the economy weakens. Now, some of the mega-cap growth players that have rallied in recent months also fit the definition of a quality stock because of their robust balance sheets, but JPAM also sees solid quality opportunities in value-tilted sectors, like energy, and in some bigger financial stocks. With such a wide gap in valuations between the growth and value sectors, it says you’re going to want to ensure that your portfolio is well-balanced across both styles.

Factor ETFs can be a great way to build a diversified portfolio. The iShares USA MSCI Quality Factor ETF (ticker: QUAL; expense ratio: 0.15%) can give you exposure to quality stocks, for example. You could consider adding the iShares MSCI USA Value Factor ETF (VLUE; 0.15%) to increase your exposure to value stocks or opt for the Energy Select Sector SPDR Fund (XLE; 0.1%) for value-tilted energy stocks. Shares of JPMorgan or Berkshire Hathaway can deliver big-cap financial sector exposure.

Size. With all the recession fears out there, it makes sense to invest in firms that have stronger balance sheets, rather than those that don’t, and that focus will generally lead you to big-cap companies. And for that, you might want to consider the Vanguard Large-Cap ETF (VV; 0.04%).

Dividends. A tilt toward dividend payers may also help to buffer equity portfolios from more volatility ahead. JPMorgan Asset Management's analysts like the healthcare and utilities sectors for their defensive qualities. For dividend exposure, you could consider the Vanguard Dividend Appreciation ETF (VIG; 0.06%), the iShares U.S. Healthcare ETF (IYH, 0.39%) for healthcare, and the Vanguard Utilities ETF (VPU; 0.1%) for utilities.

Regional diversification. Cheaper multiples and stronger dividend yields should mean that stocks in the UK and Europe fare relatively well compared to the US if valuations start to come under pressure. And shares in China, despite the country’s lackluster growth and its geopolitical risks, could also do well: with moderate government debt levels and low inflation, policymakers have the leeway to spend and ease interest rates to support households and the economy. But the analysts are more cautious about Japan, worried that despite its recent strong performance, monetary tightening or a global recession could lead to a stronger yen, and erode the value of overseas earnings for its important multinational companies. You could consider the iShares Core MSCI Europe ETF (IEUR; 0.09%) for European exposure or the iShares MSCI China ETF (MCHI; 0.58%) for China.

Clean energy scarcity. If a recession does happen and “growthier” clean energy firms are caught up in a broad-based stock market decline, that could present some buying opportunities in renewable energy, efficiency, carbon capture, electrical vehicles, and the like. But you’ll want to keep in mind that solving energy scarcity creates another scarcity issue: materials scarcity. Demand for certain metals, such as lithium, copper, and silicon, will soar as the energy mix is transformed. While you could consider investing in a giant lithium mining and processing company like Albemarle, you could also consider investing in the iShares MSCI Global Select Metals & Mining Producers ETF (PICK; 0.39%), which provides exposure to the world’s biggest traditional miners, including BHP and Rio Tinto.

Labor scarcity. The shortage of labor in developed countries is an ongoing challenge, but JPAM’s analysts say automation and AI are likely to offer some relief. For AI exposure, the Invesco QQQ Trust Series (QQQ; 0.2%) would seem to do the trick.

Bonds. With their higher yields, government bonds could offer some real upside in a deep recession. But there’s still a chance that a recession is avoided for now and that inflation pressures don’t fall as much as expected. In this scenario, the cuts in interest rates that are already priced in by bond markets might not happen: in fact, central banks might be forced to raise interest rates even higher. As a result, bonds – and quite possibly stocks – would struggle.