5 Observations on the Markets

The Federal Reserve recently raised policy rates by 75 basis points, which it hasn’t done since 1994. The Fed’s message seems clear: It is solely focused on containing inflation and it is willing to harm growth to do so. Many investors are now assuming that a recession is necessary to cure the inflation problem.

What to make of it all?

1. The Fed is willing to harm growth to control inflation. On the labor market, the Fed’s 2024 projection for the unemployment rate is 4.1% which, assuming a constant labor force, implies about 800,000 fewer people on payrolls.
2. Prices at the pump matter. Gasoline accounted for 20% of the monthly change in the CPI Index. Lower oil prices may be the quickest way to fewer rate hikes, but further gains could mean a more aggressive Fed.
3. Tightening is a global phenomenon. Central banks in the United Kingdom, Switzerland, Taiwan, Brazil and Hungary raised interest rates in recent weeks. Now that central banks are being forced to respond to inflation, volatility seems set to remain elevated at levels more akin to the early 2000s than the mid-2010s.
4. Stock markets are under pressure. The S&P 500 has officially entered bear market territory. We probably aren’t there yet, but the equity market is getting closer to reflecting a slowdown in economic growth that may be deeper than we think.
5. Discipline through discomfort. Bear markets can be painful, but enduring them is critical for long-term investment success. The only good thing about bear markets is that they tend to turn into bull markets
eventually.

In our Mid-Year Outlook, we made three suggestions on how investors can navigate this uncomfortable environment.

Lower oil prices may be the quickest way to fewer rate hikes, but further gains coud mean a more aggressive Fed.

First, core fixed income yields are implying compelling returns on a go-forward basis, and would likely provide protection if a recession does come to pass. Next, quality equities should outperform as the Fed continues to fight inflation. Finally, there are compelling opportunities to position for structural change throughout this cycle and next.

Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles