Why now is an attractive entry point for long-term investors, says JPMorgan strategist.
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It feels like everything is going wrong in the market. The major indexes broke below their 200-day averages, and some 60% of companies that have reported results have traded lower afterwards.
That’s even though the reality actually isn’t so bad. The U.S. economy just registered its fastest rate of growth in two years, inflation has been cooling, and three-quarters of S&P 500 companies that have reported earnings have beaten analyst estimates.
“In all, markets seem to be pushing back on the idea that everything is rosy and fine. And to be fair, it’s not. There’s no denying there is plenty to worry about—from ongoing tensions in the Middle East, to ‘higher for longer’ central bank policy and its effects, to large fiscal deficits, to consumer pressure points,” says Madison Faller, global investment strategist at JPMorgan Private Bank.
Still, is there maybe too much pessimism in the air? She thinks so. “Growth stands to slow, but that’s very different from calling for an all-out stop in economic activity. For instance, the consumer may start to spend less and switch to cheaper brands, but for the most part, everyone who still wants a job has one. This dynamic is actually key to a soft landing, which requires not an acceleration in growth, but enough of a slowdown to ensure inflation pressures can make the last mile of progress,” says Faller.
Another point she makes is that if the economy does slow, bond yields should fall, offering valuation relief to equities. “We may be in an air pocket of discomfort, but the more markets anchor on pessimism, the better the potential for future returns,” she says. “When markets are volatile, it can help to re-focus on what you want from your portfolio in the long run.”
She points to the bank’s 28th annual long-term capital market assumptions: 2.9% annual returns for cash, 5.1% for bonds, 7% for U.S. large-cap stock returns, and 7.8% returns for global equities. Don’t T-bond and chill — historically, every major asset class has performed better than cash over 10- to 15-year horizons, she says. The bank also recommends alternatives like real estate, infrastructure, private equity and hedge funds as hedges against inflation (though it should be said private equity has struggled with higher interest rates).
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The market
U.S. stock futures ES00, 0.85% NQ00, 0.89% rose, after two weeks in which the S&P 500 SPX has dropped nearly 5%. Gold futures GC00, 0.52% traded over $2,000 an ounce. The yield on the 10-year Treasury BX:TMUBMUSD10Y rose 9 basis points, while oil futures CL00, -1.98% fell.
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