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LABJ Stock Index: April 17

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Gauging the Path Forward

Markets are powering through turmoil, but is a recession looming? 

In our 2023 Outlook, we asked investors to “see the potential” for weaker growth but stronger markets. So far, that thesis is on track. While growth seems to be slowing down, and new challenges have arisen, markets so far have delivered a much stronger performance than they did last year.

Here are the areas we’re watching as we gauge the path ahead.

Economics: The Art of the Pivot. The Federal Reserve has the tall order of cooling the economy down with as little economic pain as possible. But with inflation sticky, the most likely cost of getting things under control looks like a recession. The trick will be raising rates high enough and holding them long enough to slow things down, while also knowing when to start cutting when growth becomes precarious. The bite of last year’s rate hikes and tighter lending conditions from banks should pressure growth further. We think this means the Fed will hike once more in May and hold on until the final months of this year, when our base case of a recession will likely unfold. For investors, that pivot could provide some much-desired clarity.

History: Is This Time Different? The Study of Crises. In addition to combating inflation, the Fed is focused on the separate but intertwined task of maintaining financial stability. While there may be further shocks, we believe this situation looks very different from the global financial crisis, and bank stress is showing meaningful signs of easing. That said, confidence can be tricky, and it will be a dynamic we’ll continue to watch.

Barragan

Finance: The Business Life Cycle. It matters how this all affects corporate profits. Heading into this year, many expected earnings to rapidly deteriorate and catalyze another round of market weakness. While momentum is definitely slowing, the last quarter showed that the average company in the S&P 500 still grew earnings by 3%. Headwinds such as slower growth, higher prices, and general business uncertainty must be weighed against tailwinds such as growing efforts to cut costs, stronger supply chains, and a weaker U.S. dollar. How businesses are impacted by the changing tide – and react to it – will be key.

Home Economics: Personal Finance and Planning. We’ve said over the last few weeks that steady hands often prevail. While markets can always have a bad day, week, month or even year, history suggests investors are less likely to suffer losses over longer periods – especially in a diversified portfolio.

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

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