Like the seasons, investment backdrops change. Sometimes it happens more quickly than you expect. In fact, over the past two years, our composite tracker of the U.S. economic lifecycle has shown the fastest move from recession to the middle stages of an expansion since 1975. At this rate, investors might find themselves navigating the “late” cycle by year-end.
What history tells us
• A slowdown in economic activity. The broad economy continues to grow, but at a rate more in line with the average. In 2021, we saw the U.S. economy expand by nearly 6%. We’re expecting something more like 3.1% this year, and below 2% next year.
• Mounting headwinds to corporate profitability. Following the period of global lockdowns in 2020, companies saw some of their strongest quarters of earnings growth in history. Today, price pressures plus a slowdown in demand growth are conspiring to challenge broad market earnings growth, urging more selectivity from investors.
• Increasingly restrictive monetary policy. The Federal Reserve and other central banks have been loud and clear: in order to get inflation under control, policy rates need to move higher to cool things off.
There are still gains to be reaped in the later stages of the cycle and staying invested has historically served people well. But making tweaks to portfolio exposures can help optimize the tradeoffs we make between risk and return for the changing environment — think of it as some “spring cleaning.” Three high-level considerations for investment positioning include: be mindful of where you park your cash; sell high-yield fixed income and move into core bonds; and swap highly cyclical stocks for more defensive ones.
The bottom line
A maturing economic cycle calls for a portfolio tune-up, but not an overhaul. More volatility should be expected in the future, and the shifts discussed above may help smooth out the ride for investors. There are other considerations as the backdrop continues to evolve (e.g., using that volatility to add some downside protection while maintaining market exposure), and we’re here to guide you through them.
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
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