A World in Transition

Heading into this year, many investors were prepared for a vibrant economic cycle. Now, the outlook is more challenged. The tailwinds from healthy consumers and corporations and innovation remain in place. But the business cycle has progressed at a historically fast pace, and monetary and fiscal policy are no longer adding support.

As we enter the second half of the year, we cast our eye on a world in transition and consider what it means for investors, this business cycle and the next. The transitions we observe are connected to the three drivers that will determine the trajectory of the global economy and financial markets in the second half of the year.

Those drivers are:
1. The end of the era of “easy money” (i.e., large amounts of government spending combined with ultra-low interest rates and abundant liquidity support) and the shift to tighter monetary policy;
2. The ongoing ripple effects of Russia’s invasion of Ukraine;
3. And China’s shifting role in the global economy.

Central banks’ – particularly the Federal Reserve’s – campaign against inflation raise the most pressing issues for investors. U.S. headline inflation, near its multi-decade high, and a tight labor market necessitate tighter monetary policy. But the pandemic’s lingering impacts on the economy make it difficult to decipher how much tightening is necessary.

The economic impact of Russia’s invasion of Ukraine will likely be most acute in Europe, given the continent’s dependence on Russian energy. Economic momentum is already slowing. The risk of a Russian energy embargo is certainly elevated.

In China, COVID-19 lockdowns are curtailing 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.

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

The business cycle has progressed at a historically fast pace.

We think investors can take three steps to prepare goal-aligned portfolios to potentially weather this cycle and next:
• Rely on core fixed income as portfolio ballast
• Prioritize balance and quality in equity portfolios
•Position for structural change

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