Outlook 2020: Videocast

JPMPB – 1213 – Outlook Video Cast – Text Alternative Script

Side note:

This video shows text, charts, and images that appear on a large screen in front of an auditorium stage.

Legal disclosures appear.

Text on screen:

INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.

Please read important information at the end of this video.

Logo:

J.P.Morgan.

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2020 is here.

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A montage of images appears pertaining to energy, agriculture, currency, transportation, and the United States.

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So what should you focus on? Is a recession coming? What else can the Fed do? Will politics derail markets? Get the full picture, clearly.

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A cropped picture of a ship expands to reveal a bigger picture showing a fleet of ships.

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Because when you're focused, you see things others might miss.

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Small pieces of a black-and-white image consolidate to reveal a person’s eye, then further expands to reveal the face belongs to George Washington.

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Outlook 2020 – Prepared for challenges, focused on opportunity.

On screen:

A man with short dark hair, Andy Goldberg, walks onto an auditorium stage. He stands in front of a sign reading "J.P. Morgan" and addresses his audience.

Mr. Goldberg:

Thank you, thank you, everyone, so much for joining us today for our presentation of this year’s 2020 Outlook.

Text on screen:

Andy Goldberg, Head of Market Strategy and Advice, J.P. Morgan Private Bank.

Mr. Goldberg:

My name is Andy Goldberg. I’m the Head of Market Strategy here at J.P. Morgan. And today I’m going to be joined by two of my esteemed colleagues, our Chief Investment Officer, Richard Madigan, is here today, as well as Anastasia Amoroso, who’s our Head of Thematic Strategy. Our presentation this year is called, Prepared for Challenges, Focused on Opportunity. And it reflects the nature of the way that we’re managing money. Before I invite the experts that we have up on stage today, I want to spend a little bit of time recapping where we’ve been and how we got here, and give you a brief overview of the macro environment. And the most important thing to understand is that last year we issued a cautious outlook. The environment, as we moved from 2018 into 2019, was tense. We had the trade war, which was heating up.  Manufacturing was slowing down, and it ultimately turned into what I would characterize as a full-scale global manufacturing recession. And, of course, the Federal Reserve was on a hiking path. With respect to trade, the first tariffs implemented by the United States on Chinese goods was on March 9th of 2018. And ever since then, things essentially escalated.

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On a screen in back of Mr. Goldberg, a video clip shows an aerial view of a large container port.

Mr. Goldberg:

There were something in the neighborhood of nine punch, counterpunches between the two countries, and ultimately, trade between the two countries started to slow. So heading from 2018 into 2019, trade was a major concern weighing on the psychology of investors. We even had our own clients telling us that they were scaling back their own decision making with respect to their businesses in the region, a major source of uncertainty. The other thing that we were worried about was manufacturing. 

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A video clip shows the inside of an enormous automobile factory.

Mr. Goldberg:

Just to give you a couple of statistics, in February of 2018, before the onset of the trade war, about 90% of the countries that we study around the world were showing growth in the manufacturing sector as measured by PMIs and other variables.  By the time that we got towards the middle of 2019, that 90% of countries experiencing manufacturing growth had tumbled to below 40%, a full-scale global manufacturing slump. So that was another huge overhang clouding our forecast for markets. And then the manufacturing slump wasn’t only due to the trade war. The trade war sometimes gets too much credit for some of the uncertainty faced by investors. We have to also remember that the Federal Reserve, the largest and most significant central bank in the world, was making the cost of money higher.  They had raised rates, or as I like to say, hit the brakes nine times. And going into 2019, they seemed positioned to continue that path. You’ll remember that the Federal Reserve said they were a long way from reaching that neutral rate for Fed policy rates.

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A video clip shows the United States Federal Reserve Building.

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 - Trade War;

 - Manufacturing Recession;

 - Monetary Policy.

Mr. Goldberg:

And so taken together, as we were moving from 2018 into 2019, the combination of an escalating trade war, the weakness in global manufacturing, which we felt might spill into the rest of the broader economy as a risk, and tighter monetary policy necessitated taking a cautious view of 2019. But if you were to go back and look at the outlook that we published then, we also included a path that we would consider to be a bull case. What might a plausible scenario look like where things go the other way? And it turns out that that’s the path that markets and the economy has taken, because if you look today, we now know that we have a Phase 1 trade deal on the table between the United States and China. So while the trade war is by no means over, and we’re not out of the woods certainly, new or additional escalation doesn’t seem like it’s going to happen in the immediate future. We also feel that we’re getting closer to a bottom in this manufacturing slump. And one thing that gives us confidence is that the services part of the global economy has actually, in fact, held up pretty well. You have between 70% and 80% of countries seeing expansion in the services sector. So after a year of this manufacturing slump, it has not infected and spread to the broader economy. And then, last but not least, we all know that the Federal Reserve famously pivoted and stopped raising rates in 2019, and in fact ended up cutting rates three times.

Text on screen:

- Trade War - Phase 1 Deal;

 - Manufacturing Recession - Data Stabilizing;

 - Monetary Policy - Fed Pivot.

Mr. Goldberg:

So I want to be clear that we’re still late in the cycle, but the odds of a recession have receded somewhat, given this package of improvement. Now, for investors, what you all care about and what we care about is that the markets have responded to this better news in a pretty significant way.

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29 percent S&P 500 Price Return - U.S. Equities. 25 percent MSCI World Price Return - Global Equities.

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Small print text also appears.

Text on screen:

Source: Bloomberg Finance L.P., MSCI, J.P. Morgan Private Bank. December 31st, 2019.

Mr. Goldberg:

You can see on the screen the S&P 500 rose in 2019 29%, and that’s price return only. If you add in dividends, it’s even better. Around the world—and this is the MSCI World Index—it excludes emerging markets. But around the world, the market was up 25%.  Now this raises questions with many of our clients when we have conversations about whether or not the markets have already priced in all the good news or, to take it a step further, if markets are in fact complacent in the face of what is still late-cycle environment, and there’s still uncertainty. The trade war’s not over; the end of the manufacturing slump isn’t a guarantee. We still have an election. There is geopolitical tension in the Middle East. Okay? And so one thing that we feel is important to point out about last year’s returns is you’ve got to keep them in perspective. This is a simple chart, showing the MSCI World Index. In 2019, up 25%. But much of that 25% was really the reversal of the weakness that we saw heading into the year in the first place.  If you rewind and zoom out a little bit, you’ll notice that—and remember that markets peaked in September of 2018. All the fears that we already addressed really started to grip markets, and the markets fell in the U.S. about 20%, around the world between 15% and 20%. And so the markets were pricing in imminent recession. That turned out not to be the case, and markets have recovered pretty substantially. If you look over the full course, markets aren’t flat over 18 months or two years, but they’re up a little bit.

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A line graph appears labeled: Global equities basically flat since global manufacturing activity peaked. MSCI World equity prices (January 2018 = 100). The graph shows MSCI World equity prices at slightly over 100 at January 2018 and decreasing to 80 by January 2019. Between those two points, a downward arrow reads: "Recession Fears Sell Off." The chart shows an increase from 80, in January 2019 to 105 by January 2020. Between those two points, an upward arrow reads: "Fed Pivot and Market Recovery." Between the points at January 2018 and January 2020, an arrow (marked plus 5%) shows a slight upward increase.

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Small print text also appears.

Text on screen:

Source: Bloomberg Finance L.P., J.P. Morgan Private Bank. December 31st, 2019.

Mr. Goldberg:

It’s hard to go and say that today markets are completely out of whack or complacent, or overvalued, or overpriced, given the environment.  We think it’s really important to keep that in context. The other thing is last year was a little bit unusual in that a balanced portfolio did extremely well—to have a year where both stocks and bonds do so well, but this was a year where the forces conspired together. You had improving macro conditions, lower interest rates. And here you see bond markets had exceptional returns as well…

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A chart for 2019 shows U.S. 20 plus Year Treasuries up 15%, U.S. Corporate I.G. up 14%, Municipal Bonds up 6%, and USD Cash up 2%.

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Small print text also appears.

Text on screen:

Source: Bloomberg Finance L.P., MSCI, J.P. Morgan Private Bank. December 31st, 2019. Returns are total returns.

Mr. Goldberg:

…led by core bonds. In this case, we’re showing Treasury bonds with maturities of over 20 years, returning 15%; corporate investment grade bonds around 14%, and so on down the line. I think, notably, all fixed income asset classes around the world outperformed cash. And boy, are we glad that, as we were getting more cautious headed into 2019, that we didn’t opt to reflect that caution with big cash positions. There are two other things I want to address before I bring Richard into the discussion. But before I do that, just a quick summary. As we moved from 2018 into 2019, we issued a cautious outlook, but as we move from 2019 to 2020, things are decidedly better. Trade has simmered down, manufacturing is set to stabilize, we believe, and the Fed’s pivot has helped breathe new life into both the economic cycle and the market for risk assets. There are, however, a couple of wild cards that I would be remiss if not to mention. Granted, not my favorite topics. I’m not a political strategist, not a geopolitical strategist. But the most frequently asked question for the last six months that we’ve been receiving is around prospects for the U.S. presidential election that’s coming in only a matter of about nine months, and what that impact might have or what impact that might have on markets. I’m not going to get fully into this topic today. I’m going to make mostly a broad blanket statement here. I would remind people that it’s too early in the presidential election cycle to be making portfolio decisions based on this. We don’t know who the candidate is yet. Maybe we’ll know more about who the candidate is likely to be after the Iowa caucuses or after Super Tuesday, at which point we will come back to you with more information. But the most important thing is that no matter who’s elected, we’ve learned from history that making investment decisions based on the winner of a presidential election is probably a bad idea. We know there are downs and ups, and ups and downs in the economy, but over the long term, when you zoom out and look at the full picture—this being simply a chart of the size of the U.S. economy—every time the White House flips from red to blue or blue to red, you’ve ultimately seen the economy grow in the long run.

On screen:

Mr. Goldberg stands in front of a chart labeled: "Size of the U.S. Economy. Nominal G.D.P." The chart is a timeline showing continual growth from 1948 beyond 2018. It also shows photos of many of the presidents since 1948.

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Small print text also appears.

Text on screen:

Source: Bureau of Economic Analysis, National Bureau of Economic Research, Presidential Elections: 1789 - 1996, published by Congressional Quarterly Inc.

Mr. Goldberg:

Just to say it a little bit differently, if you are too afraid of who the winner might be such that you can’t invest, you also have to be okay with betting against this line continuing to go up in the future based on the election of one individual to the White House. That’s just not good investing in our view. We also think you have to have some context around the recent escalation of tensions in the Middle East. Again, we would make no claim to be geopolitical experts, but I want to make a broad statement about how we view geopolitics from the standpoint of investing. This chart’s a little more complicated, and if you want to get into further details about this, I’d encourage you to reach out to your J.P. Morgan Advisor to have that discussion.

On screen:

Mr. Goldberg stands in front of a chart labeled: "Geopolitical events seldom have lasting impact outside of commodity price disruptions."

Side note:

Small print text also appears.

Text on screen:

Source: J.P.Morgan Asset Management - Eye on the Market (July 2014 edition), Bloomberg. Data is as of April 2014. Equity index represents price returns. Events not labeled include: Korean War (1950), Soviets into Hungary (1956), Six-Day-War (1967), Soviets into Afghanistan (1979), Martial Law in Poland (1981), Falklands War (1982), U.S. Invades Granada (1982), U.S. Invades Kuwait (1991), Serbians into Kosovo (1998), U.S. Invades Iraq (2003), North Korea sinks South Korean Navy vessel (2010).

Mr. Goldberg:

But this chart basically details 13 historical geopolitical events going back to the 1950s. Each line that you see on the page represents the stock market’s reaction to one of those 13 geopolitical events. And the way that it’s drawn is that the left-hand side of the page shows the stock market in each of those 13 instances and the 12 months leading up to that geopolitical event, of course, remembering that the stock market doesn’t know the geopolitical event is coming. And then the rest of the page represents what the market did in the next 12, 18 or 24 months. You’ll notice that 10 out of the 13 lines on the page are grayed out because 12, 18, 24 months later, the markets were higher.  In other words, the geopolitical event, which is represented by this vertical line in the middle of the page, had no discernible lasting effect on the market. In red, there are three geopolitical events or three market scenarios where 12 or 18, or 24 months after the event the markets were lower. And in each of those, I would argue that it wasn’t necessarily the geopolitical event itself that caused the markets to be lower 12 or 18, or 24 months later, but rather an economic or market event with the exception of one of them. First, the top one, that line was lower 12 or 24 months after the September 11th attacks here in New York City. But I would argue that those attacks actually happened in the relatively immediate aftermath of the tech bubble bursting in March of 2000. That took two-and-a-half years for the tech bubble to unwind. And so I would argue that while there would certainly be a significant market impact due to the geopolitical event itself, a huge portion of that market downturn was related to one of the historic asset bubbles of our generation. The next one represents a period around 1968, involving the Soviets going into Czechoslovakia. If you actually study the data pretty closely, you’ll notice that the markets were resilient through the geopolitical event. It wasn’t until a year or two later, when inflation became a problem domestically, that the market started to falter. Again, that’s an economic thing, not a geopolitical thing. The final one is the one that I have in my mind when I think about the Middle East. This was in 1973 around the time of the Arab-Israeli War, which ultimately resulted in the OPEC oil embargo, much higher energy prices and inflation in the United States. And while I believe we are many, many steps removed from a scenario like that, it’s through the energy transmission mechanism that we’re most focused on market impacts for the Middle East. Final point, I would just remind people that we are far more energy independent as a nation today than we were in 1973. So we’ve covered a lot. We’ve talked a little bit about how entering 2020 is less concerning to us from a macro perspective than where we were when we entered into 2019. We talked about, despite the incredible returns that we’ve all enjoyed in portfolios and markets around the world, that we don’t feel markets are complacent. It’s really just a return to where they were before. And we also talked about some of the wild cards. But the most important thing to understand is how we’re positioned, given this environment. And for that, I’d like to invite to the stage our Chief Investment Officer, Richard Madigan, who is the steward of over $300 billion of your assets.  Richard, please join me on stage.

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Richard Madigan, Chief Investment Officer.

Mr. Goldberg:

Thanks for being here.

On screen:

Mr. Madigan, a man with salt-and-pepper hair and stylish clear horn-rimmed glasses, shakes hands with Mr. Goldberg. The two men sit down on cushioned chairs onstage and begin their conversation.

Mr. Goldberg:

Richard, how’s it going?

Mr. Madigan:

It’s going well.

Mr. Goldberg:

Fantastic.

Mr. Madigan:

Other than that, I feel great.

Mr. Goldberg:

Oh good, yeah. So, Richard, I, I think back to last year when we had this same conversation. I want to start just right off the bat, I know you’re not going to say that you disagree with my assessment, but I want to hear in your words how you’re viewing the world today.

Mr. Madigan:

It’s funny. I was going to kid you, saying a year ago, when you asked me the question, do I think there’s going to be a recession, and we said no, it was a lot more controversial.  And I loved how you kind of walked through a little bit of the Fed in terms of the pivot because, I think, that’s allowed markets to settle back down with greater transparency in the outlook. The outlook this year for me is still more of the same. So slow growth, uninspired growth, but no inflation. If you made me think about it, global growth probably prints somewhere around 3% this year, global inflation, 2%. That’s not a bad environment for risk assets.

Mr. Goldberg:

It’s interesting. The low inflation thing is almost a saving grace—

Mr. Madigan:

Yes.

Mr. Goldberg:

—in a lot of ways.

Mr. Madigan:

I agree.

Mr. Goldberg:

It’s what allowed for the Fed to pause and, and respond differently this time.

Mr. Madigan:

Yep.

Mr. Goldberg:

I want to dive into something that was even more controversial than the recession or recession-to-be.

Mr. Madigan:

You’re going to build on the controversy?

Mr. Goldberg:

Yeah. Controversy’s good for these conversations.  I want to… The controversy last year was heading into… So markets peaked in September of 2018 before falling almost 20% in the United States, 17%, 18% around the world. We went into that with an overweight to equities, and then through that period, not only did… So I’m… If, if I’m a steward of $300 billion of capital, I wonder if I have the steel and resolve to stick with it. Not only did you rebalance after—not only did you rebalance after the markets bottomed, you continued to add to equities, which is…

Mr. Madigan:

Yes.

Mr. Goldberg:

…turned out to be the right decision. Can you talk about why you maintained that overweight to risk assets despite all those concerns and uncertainty that were weighing on us into 2019?

Mr. Madigan:

I think the biggest part for me was separating the noise from the signal, and the macro signals weren’t bad at that point. So we kind of looked at markets that reacted to or overreacted to loud headlines, and took a very strong view that fundamentally we liked valuations and saw broad recovery around it. But we’ve done an awful lot in terms of relative positioning over the last 12 to 18 months. And you kind of teed this up, Andy, at the beginning, when we talked about a cautious outlook. You concentrate risk when things are cheap, and you’re aggressive with it. As markets rise, you diversity risk because you want to make sure you keep some of those gains to be able to come back into markets when you get the next opportunity. That active management is what we do.

Mr. Goldberg:

I’m going to stop you there just… Last year, we showed this visual on the screen. We made the comment that…  Sorry. We made the comment that risk taking in portfolios is not an on/off switch.

Mr. Madigan:

Yes.

Mr. Goldberg:

We don’t, we don’t turn on risk and then turn it off and back on and again when it’s time. We view it much more like a series of dimmers and dials that you have at your disposal to calibrate. And so when you say that we, we took measures to make portfolios more conservative, I’m thinking of some of the things you see on the page. Can you talk through some of those dimmers and dials look like?

Mr. Madigan:

Sure. Again, back to the diversification theme for me on this. We’re still pro-cyclically positioned in portfolios.  So I’m overweight stocks. I think stocks outperform bonds this year. But if you look at what’s kind of going on with the dimmers behind the scenes, we’ve dialed up things like duration.  And, by the way, we started doing that about 18 months ago.  And, again, very controversial leaning into buying bonds at that point.

On screen:

An infographic appears showing a large meter, indicating decreasing "Risk" - as well as smaller dials labeled: “Cycle sensitive,” “Secular trends (technology and healthcare),” “Liquidity,” “Interest rate risk/duration,” and “Quality.”

Mr. Madigan:

We’ve moved up in quality. So if you look at portfolios, we’ve actually exited this year, given the rally we’ve seen in extended credit, high yield and emerging market debt. And not as a negative, but again, I want to diversify the risk. And I feel better owning stocks than I do that extended credit piece. That’s a quality dial, I guess, in terms of how we managed it. And then liquidity. I want to make sure that we’re liquid enough in terms of moving around portfolios. That if we get the next bump—and there will always be the next bump—we can be as active as we were at the end of 2018 and early 2019, and be able to come back into markets.

Mr. Goldberg:

So still today, the portfolio has a tilt towards equities.

Mr. Madigan:

It does.

Mr. Goldberg:

It’s still overweight equities?

Mr. Madigan:

Yes.

Mr. Goldberg:

Okay.

Mr. Madigan:

In U.S.

Mr. Goldberg:

In the U.S.

Mr. Madigan:

Yep.

Mr. Goldberg:

And tell us why the U.S. is the preferred.

Mr. Madigan:

It’s funny. For me, greater transparency in terms of where we are in the macro environment. So what we didn’t talk about when I talked about the 3% growth outlook, U.S. trend growth is probably 2%, European trend growth, 1%, Asian, Japanese trend growth outside of emerging markets, .5% to 1%.  And they’ve got a lot of uncertainty still with regard to the policy response. And central banks, they are being able to drive the ability to put more stimulus back into the economy. The markets still expect the Fed to ease one more time in the second quarter of this year. And, I think, it’s more probable if they move—and I don’t know that they will move—that they would cut rates rather than hike them.

Mr. Goldberg:

Sure. Now just to be clear, an overweight to the United States does not necessarily mean that you think the U.S. will be the best performer. There’s a portfolio construction consideration to that. Correct?

Mr. Madigan:

Well, it’s a probability dynamic to me. So again, given the rally that we saw last year and some of the uncertainty we’re seeing in markets currently, I have greater confidence that the U.S., looking forward 12 months, has upside to it as a base case. But I’m a little less certain when I look at things like emerging markets short-term, Europe and Japan.  None of those is a negative. I’d love to be able to step in with greater certainty to add to them. It’s just not an obvious place to me, given where we are at the beginning of the year.

Mr. Goldberg:

So the U.S. is higher conviction. And also, in an adverse scenario, the U.S.…

Mr. Madigan:

I think it’s more defensive.

Mr. Goldberg:

…is more defensive.

Mr. Madigan:

Yeah.

Mr. Goldberg:

Let me shift gears a little bit.

Mr. Madigan:

Sure.

Mr. Goldberg:

Things feel tense still…

Mr. Madigan:

True. 

Mr. Goldberg:

We, we… …for me personally, and also in markets.

Mr. Madigan:

Yes.

Mr. Goldberg:

But we can talk about my personal life in the next outlook.

Mr. Madigan:

Okay.

Mr. Goldberg:

The, the… You’ve got the Middle East.

Mr. Madigan:

Yes.

Mr. Goldberg:

You’ve got an upcoming election. We’re late in the cycle. It’s been 10 years of bull markets. So when things are that tense and, and there still is uncertainty, how do you, how do you reflect some of those geopolitical tensions in, in your investment process, or, or do you just not?

Mr. Madigan:

It’s an awesome question, and as you kind of teed up, given everything going on in the world right now. So I start fundamentally in terms of looking at the macro economy: Where we are in the market cycle and what we think about that. What’s happening with monetary policy, fiscal policy? And then anchoring all that around valuations: What do we think is cheap, what do we think isn’t, and how do we want to move things?  That’s how I start in terms of tactical capital allocation. I would love to say that I don’t pay any attention to geopolitics and politics. I do. We watch it closely. I probably spent more time with our lobbyists and consultants around politics in the last two years…

Mr. Goldberg:

Just for future reference, they’re called Government Relations.

Mr. Madigan:

Okay. Thank you.

Mr. Goldberg:

No problem.

Mr. Madigan:

But when we kind of looked at that dynamic to it, I don’t really care about politics outside of it creating scary headlines that creates an opportunity for me until it leans into fundamentals. So it’s actually got to impact policy. And let me give you two really good examples.

Mr. Goldberg:

Yes.

Mr. Madigan:

One, if you looked at the tax reform initiative that the U.S. government put out two years ago, that was a very clear signal for me to dial up our allocations to U.S. equities.  Tremendous opportunity. Counterpoint—and you kind of hit this

before on trade, when trade became a ping pong as opposed to a sparring match, that you teed up at the beginning, between U.S. and China—we literally said it’s creeping into policy. We don’t want to be involved in it, so we stepped back from emerging markets. We’ve been out of it for three years, and that’s been the right positioning so far.

Mr. Goldberg:

Excellent. I want to end with one broad question, and then I’ll ask for a summary comment. Every year, J.P. Morgan publishes a robust research thought leadership piece called The Long-Term Capital Market Assumptions.

Mr. Madigan:

Yep.

Mr. Goldberg:

The idea is it’s a, it’s a thought exercise…

Mr. Madigan:

Yep.

Mr. Goldberg:

…to try to lay out our view and a framework for how we see a range of different, up to 20 different asset classes…

Mr. Madigan:

Yes.

Mr. Goldberg:

…how we think they’ll perform over the next 10 years. The starting point for asset prices is, weighs heavily in that process, meaning if markets have done really well and markets are high, future return expectations tend to be lower and stuff like that. This is a chart that actually represents the history… We’ve been doing this for 24 years.

Mr. Madigan:

Yes.

Mr. Goldberg:

This chart represents a history of our 10-year forward-looking expectations. Historically, they’ve been broadly accurate. Today, the estimation, in our view, for the next 10 years for a diversified 60/40 stock bond portfolio, it’s around 5.5%. It’s the lowest it’s ever been. This is what the world looks like.

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A line graph appears labeled: "A 60/40 portfolio is expected to return 5.5% over the next 10 to 15 years." It shows a slightly fluctuating, overall decreasing line, labeled: "L.T.C.M.A. 60/40 allocation return assumption."

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Small print text appears.

Text on screen:

Source: MSCI Barclays, J.P. Morgan Asset Management as of December 13, 2019.

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Legal disclosures appear.

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FOR ILLUSTRATIVE PURPOSES ONLY.

This information is intended as a generalized estimated asset class assumptions of future market conditions and not in the context or any investment product, portfolio, or strategy. References to future returns are not promises or even estimates of actual returns or performance. A 60/40 balanced portfolio is 60% MSCI AC World Equity, 40% U.S. Bloomberg Barclay Aggregate Bonds - it is not possible to invest in an index. Please see "Understanding Long-Term Capital Market Assumptions" for additional information.

Mr. Goldberg:

Now that’s also, of course, assuming that you passively accept this reality. Can you talk to us a little bit about what a fund manager or a CIO team can do to be tactical to say, no, I don’t accept this reality? And I… The other thing I would say to the viewers is if to the extent that people aren’t talking about this or challenging this status quo, that’s a problem. This is a reality that we have to have a dialogue about, you have to have a plan for. And that’s going to segue nicely into my conversation with Anastasia.

Mr. Madigan:

So two things. I don’t think I’ve ever or ever will be accused of accepting anything—

Mr. Goldberg:

No. Yeah, you’re right.

Mr. Madigan:

—for what that’s worth. And you’ve got to keep this in context. My team contributes to these, so they’re very, very important in terms of the foundational knowledge we use in framing how we look at strategic and tactical asset allocation. You teed this up brilliantly when you put up the chart of 2018–2019. So these are average returns over 10-plus years. That does not mean that returns each year will be 5.5%. And I want to anchor that because we’re active managers. That’s what I do.  And, and to your comment in terms of relative emotion, I can be emotional as a parent, but I am clinically unemotional in terms of how we look at markets and how we take advantage of it. This, to me, is something that, as long as you’re signaling when you concentrate risk to a prior conversation and when you’re diversifying risk and are agile enough, determined enough to take advantage of opportunities that you think have fundamental value in them, you move very quickly. We literally, I think, began buying stocks right after Christmas in December of 2018.

Mr. Goldberg:

I remember the… I remember the exact day.

Mr. Madigan:

So we had teed up all of that. So I think the answer is active management. I can spend more time and talk a little bit about positioning if you want me to, but at a very high level, we talked about overweight stocks to bonds. I’m overweight to the U.S. We hit on it. Within the U.S., I’m overweight technology and healthcare. Within credit and allocations, again, out of extended credit—so we’ve dialed those risks back—into very high quality and full duration in bonds.  And that part, to me, in terms of anchoring is really, really important. The last one—and we didn’t talk at all about this—hedge funds. So for the portfolios that we have that actually own alternatives, they’ve been a brilliant pairing with bonds over the last 12 months in terms of diversifying risk.

Mr. Goldberg:

Provided you pick the right ones.

Mr. Madigan:

Yes.

Mr. Goldberg:

The hedge fund world is a really big, messy place. And so you’ve got to pick the right ones.

Mr. Madigan:

Well, I was going to say we leaned into macro.

Mr. Goldberg:

Right.

Mr. Madigan:

So something defined to complement, to diversify the risk in a portfolio that wasn’t taking beta.

Mr. Goldberg:

Well done. Well done. Richard, any final summary points or guidance that you would give to our, our audience as they think about the year ahead and beyond?

Mr. Madigan:

The most basic guidance to me—and it’s the benefit that I take an awful lot in terms of managing money—this is long-term money. Don’t be cute managing long-term money. And people pretending to have views on things like the Middle East at the moment, we don’t know where it’s going. Politics in the U.S., yeah, watch every policy initiative, but let’s see who’s running and then what’s the practical application of what can actually happen in getting legislation pushed through whoever wins in November. And know that we’re managing money for you. We’re looking at screens every day; we’re managing positions every day. We’re happy to take advantage of it. That’s my job.

Mr. Goldberg:

Excellent. Richard, thank you so much for joining us. Can’t wait for 12 months from now to see how we’re doing.  Thanks. Thanks for joining.

Mr. Madigan:

Thank you.

Mr. Goldberg:

Cheers.

Mr. Madigan:

Thank you.

On screen:

The two men shake hands and stand up. Mr. Madigan leaves the stage; Mr. Goldberg addresses the audience.

Mr. Goldberg:

I want to just make a couple quick summary points about Richard’s comments and hearken back to the title, Prepared for Challenges and Focused on Opportunity. As you think about some of the challenges in the market that, and think about some of the geopolitical uncertainty that’s out there, Richard highlighted a number of different measures that they’ve taken to dial risk down in portfolios underneath the surface to help portfolios weather the storm. But at the same time, the portfolio still remains focused on opportunities, it still remains overweight to equities, given, again, we think stocks will beat bonds. People make decisions, self included, based on the way that we feel oftentimes. When I feel nervous, I’m less likely to want to take risk in, in my investment portfolio. When I’m feeling good, I’m more likely to want to take risk. One of the things that I learn year after year from Richard and his team, and the entire J.P. Morgan platform of professional money managers, is leave it to the professionals. They try to be quite clinical about how they do that, as evidenced by sticking with that equity overweight through the downturn and beyond. The last thing I want to do today is spend a little bit of time addressing head-on the lower return message that Richard and I touched on. And to do that, I want to bring up Anastasia Amoroso. Anastasia is our Head of Thematic Investing. And Anastasia spends time digging into some of the disruptive and industry trends that are shaping the world that we live in today and in the future. And she’s going to share what our high-level themes are as we address portfolios in this environment and dig specifically into her highest-conviction growth themes over the next five to 10 minutes before we call it a day. So please join me in welcoming Anastasia to the stage.

On screen:

Ms. Amoroso, a woman with long blonde hair, wearing black business attire, walks on stage.

Text on screen:

Anastasia Amoroso, Global Market Strategist.

Ms. Amoroso:

Thanks, Andy. It’s great to see everybody. I want to start by talking about three themes that are top-of-mind for us today that are permeating our decisions today. The first one of them you did hear Andy talk about, which is finding growth in the low-growth world. You’ve heard Andy talk about portfolio returns and how the expectations for those portfolio returns are coming down, so that’s why it is so critical to be looking for those opportunities for growth to supplement the great work that Richard and team are doing, managing longer-term assets. The second theme that is key to our thinking is harvesting yield. That’s great that central banks around the world have cut rates. About 23 of them have last year. This has been supportive for risk assets, but this has made the search for yield that much more difficult. So this is why, as we think about finding yield, we’re starting to think about other assets in addition to bonds, and those are preferred bonds, that’s real estate and also high-dividend-paying equities. The third theme that is key for us is investing through uncertainty. What do I mean here?  We have our best-case scenario, but let’s face it, there’s things that can go against it. And also, as Andy and Richard have talked about, we are in late cycle still. And by the way, valuations have gotten a little bit extended. So we have to take that into account and make sure that our portfolios are appropriately positioned, and down-side protection is embedded in those. So that’s why we do look to gold, we do look to core bonds to provide a little bit of a downside protection. But the theme that I really want to focus on today is finding growth in the low-growth world. Richard mentioned that U.S. GDP growth, trend growth is about 2%. That doesn’t sound exciting to anybody. And yet you look underneath the surface, there’s no shortage of secular, long-term megatrends that are going to happen this year, next year, five years from now, and the next decade. So I want to talk to you about three of those specifically today: digital transformation, healthcare innovation and sustainability. So let’s start with digital innovation. When you think of technology, what would you say is the biggest trend in tech today? Well, I say the biggest trend in tech today is the growth in data. Consider this stat: 90% of the data in our datasphere today has been created in the last two or three years, 90%. And that, by the way, is just the tip of the iceberg because our datasphere is going to quadruple in size over the next five years.

On screen:

Ms. Amoroso stands in front of a bar chart labeled: "Global Datasphere is expected to quadruple by 2025. The chart shows zettabytes per year (1 zettabyte equals 1 trillion gigabytes.) The chart shows an increase in zettabytes - from about 2 in 2010 to about 40 in 2020. The chart shows a projected increase to about 180 by 2025.

Side note:

Small print text also appears.

Text on screen:

Source: Seagate, Data Age 2025, November 2018.

Ms. Amoroso:

This is the data that will need to be collected, connected, processed, analyzed and ultimately protected. So where is the investment opportunity? Well, data collection and storage means cloud computing. The connectivity and the faster speeds means 5G. And finally, the analysis of data means artificial intelligence. Only 1% of the datasphere today is actually currently being analyzed. And you know what? It is not humanly possible for us to make sense out of that data without the help of artificial intelligence. Let’s talk about the next theme, the next megatrend, which is healthcare innovation. There’s no shortage of innovation in healthcare because there is no shortage of challenges. You know some of them. Let’s face it, healthcare costs in the U.S. are too high, and we actually know what’s driving that. Some of the top contributing diseases to the healthcare costs is cancer, diabetes, heart disease. Then you think about the rare and genetic disorders. They afflict over 25 million Americans today in the U.S. And by the way, half of those are children. Now these diseases oftentimes don’t have a cure, they have costly lifelong treatments, and maybe there’s a better way.  Then you think about the misdiagnosis, and lack of personalized medicine, and so forth. So there’s lots of challenges. But the great news about this today is that the scientific community is coming together with the regulators and biotech companies to address some of those challenges, and this is resulting in technological breakthroughs. I want to give you one example which relates to gene therapy.  So what if, instead of a lifelong treatment, you could actually have a onetime cure for that genetic disorder? Well, that is possible today, and the name of that is gene therapy. Gene therapy allows a onetime treatment to be administered such that it edits the defective gene or it inserts a missing gene into a patient so that it fundamentally addresses the root cause of the disease. Now that sounds a little bit scientific, a little bit farfetched. I tell you, this is actually becoming our reality today. So take a look at the number of clinical trials that have been conducted around gene therapy over the years, and take a look at the significant increase just in the last two years alone.

On screen:

Ms. Amoroso stands in front of a bar chart labeled: "Innovative treatments like gene therapy are fundamentally changing how we treat and maybe cure serious illnesses." It shows 123 gene therapy clinical trials, in 2016, approved worldwide - increasing to 224 in 2017 and 232 in 2018.

Side note:

Small print text also appears.

Text on screen:

Source: The Journal of Gene Medicine. Data as of December 31st, 2018.

Ms. Amoroso:

So, what this tells you is that this is becoming much closer to reality, commercial reality, today because more and more of these clinical trials are moving into later stages, which means they should be commercially available rather soon. Gene therapy is one of the most compelling trends within healthcare, but there’s no shortage of others. And this is for sure a multiyear investment opportunity for us. The last thing I want to talk is sustainability. And many of you have heard about sustainability. This is mentioned at every economic conference, in every media report, and many annual reports. What exactly is sustainability? Sustainability is avoiding the depletion of natural resources, it’s avoiding waste, pollution, overuse of resources. This is important, and I want to take it one step further. Sustainability, to me, is about making sure we make the most efficient use of our natural resources while minimizing the damage, while satisfying the basic human needs of all the population. What do I mean by that? What can you and I not live without on a daily basis? Food, water, clean air, electricity. Well, here’s a couple of stats for you: 800 million people in the world today are starving; another 2 billion people experience food insecurity. And yet, a third of the food that is destined for human consumption is wasted. It ends up in the garbage. There’s got to be a better way. There’s got to be a way to fix the shortage, to fix the difference, the gap between the supply and the shortage. And we’ve got to be more efficient with our food delivery, supply chains and production systems. So luckily, there’s technologies that are available. The last thing that I’ll share with you is around water. It takes a thousand gallons of water to produce one pair of jeans. It takes 37 gallons of water to produce one cup of coffee. And yet, almost half of the world’s population is going to be living in areas of water stress by 2030. Again, there’s got to be a better way. There’s got to be a way where we can make better use of our water resources. So, Andy, these are just some of the issues that the topic of sustainability covers, and there’s many more. We could talk about climate change, we could talk about renewable energy. And the good news here is that the governments around the world are quite focused on this issue.

On screen:

Ms. Amoroso stands in front of a bar chart labeled: "As consumers, investors, and governments get serious about climate change, renewable energy and electric vehicles are key."

Ms. Amoroso:

This is a chart of CO₂ emission standards. And you can see they’re getting stricter by the year. So sustainability, I think, will be one of the defining issues of this next decade.  The governments are going to be focused on it, and they’re going to be driving more sustainable economies. So there’s a lot to talk about when it comes to megatrends.  These are just three of them, and hopefully, we can discuss more in the future.

On screen:

Mr. Goldberg stands at a podium on stage.

Mr. Goldberg:

And, Anastasia, just before you leave, thank you so much for that. I know that there are a lot more than just these three megatrends that you want to talk about. Just in the interest of time, we shared three. The other thing that I would just reference is to remember that, you said that these are multiyear trends. The idea behind these trends is that we don’t have to think so much about the cycle and worry so much about where we are with, with the possibility of a recession. 

These are the kinds of things that, in our view, will persist whether the cycle ends or not. And so we would encourage our clients to be thinking about opportunities in these, in these sectors.

Ms. Amoroso:

These are the themes for the next year, five years, for the next decade, really.

Mr. Goldberg:

Absolutely. So please remember again to reach out to your J.P. Morgan contact to learn more about these.  Anastasia, thanks so much for being here.

Ms. Amoroso:

Thank you.

On screen:

Ms. Amoroso shakes Mr. Goldberg's hand and walks off stage. Mr. Goldberg addresses the audience.

Mr. Goldberg:

Sure. I’d just like to leave you with a few final thoughts. It’s always important when investing to have an eye on the markets and the economic cycle. It helps inform the tweaks you make to your portfolio as the environment unfolds. But it’s not necessarily the most important thing. In our view, the most important thing is that investors have a plan for their future and align your portfolios to meet the objectives that you’re trying to achieve. We at J.P. Morgan refer to it as a goals-based approach to investing. Everything that I discussed today with Richard and with Anastasia may not necessarily apply to you and your situation. That’s the intent of what I’m trying to convey.

On screen:

A bar chart appears labeled "Intended outcomes should drive your investment strategy." It shows the variability of 1-year stocks from positive 60% to negative 41%, 5-year rolling stocks from positive 30% to negative 6%, 10-year rolling stocks from positive 21% to negative 4%, and 20-year rolling stocks from positive 12% to positive 6%.

Side note:

Small print text also appears.

Text on screen:

Rolling total returns, 1950-2017. Sources: Barclays, FactSet, Federal Reserve, Robert Shiller, Strategas/Ibbotson, J.P. Morgan Asset Management. Returns shown are rolling monthly returns from 1950 to 2017. Stocks represent the S&P 500 Shiller Composite. Data is as of December 31st, 2018. Analysis is based on the J.P. Morgan Guide to the Markets - Principals for Successful Long-term investing.

Mr. Goldberg:

This simple picture represents the basic reality that stocks are more volatile and have a great variability of outcomes in the near term than they do over longer periods of time. If you look at the first set of bars, this represents the variability of the stock markets returns over the last 60 years, over one-year time horizons. In other words, over any given year, over the last six decades, stocks could have done as well as up 60% or as bad as down 40%. For investors with a short-term time horizon, maybe you need the money to make a down payment on a house in the next couple of months. Perhaps that down payment money should not be exposed to the variability or the volatility inherent in equity markets. On the other hand, longer-term investors can afford to take more risk because the time horizon is longer. I’m thinking here about savings for retirement or investments perhaps for a child’s college education 18 years away. In this instance, on the far right-hand side of the chart, you can see that the outcomes for long-term money have been decidedly less volatile, and there’s less variability there. In fact, over the last 20… In fact, there are no 20-year periods in the last six decades where the market hasn’t delivered a positive outcome for investors. We think it is so important that you have these conversations to align your portfolio to your goals.

On screen:

The stage screen displays text summarizing the conclusions of the talk.

Text on screen:

Conclusions:

·        Recession risk is elevated but has receded since last year;

·        Equity markets are poised to add to gains in 2020, beating bonds;

·        Portfolios are prepared for challenges, but focused on opportunity;

·        Secular growth, harvesting yield, and investing through uncertainty are our key themes.

Mr. Goldberg:

To just wrap up where we’ve been today, we talked a little bit about the macro overview, and you can see in the conclusions that, while we’re still late in the cycle, the odds of a recession have receded, given that the trade war seems less likely to escalate in the near term, manufacturing looks poised to stability, and central banks around the world have eased. But that easing has also caused a challenge with respect to income. Growth is slow, and there is still uncertainty. So a portfolio, by definition, has to be prepared for these challenges. And you heard from Chief Investment Officer Richard Madigan some of the many ways that he’s implemented safer positions within portfolios across our platform to be prepared for those challenges. You’ve also heard from Anastasia and Richard ways that we’re taking advantage and staying focused on some of the many opportunities that exist in 2020 and beyond. I’m going to conclude there, but I wish everyone a fantastic 2020. And please continue to check in with J.P. Morgan as the year goes on. But we will review and update our outlook as the markets and as the developments of the macro cycle transpire.  Thank you very much for joining. Happy New Year.

On screen:

Mr. Goldberg smiles and walks off stage.

Logo:

J.P.Morgan.

Side note:

Legal disclosures appear.

Text on screen:

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·        The S&P 500 Index tracks the stocks of 500 mostly large U.S. companies.

·        The MSCI World Index is a free float-adjusted market capitalization weighted index that is

·        designed to measure the equity market performance of developed markets. The index consists of

·        23 developed market country indexes.

·        Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.

·        US 20+ Year Treasuries are represented by the Bloomberg Barclays US Treasury (20+ Y) index which measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury with 20+ years to maturity.

·        USD Cash is represented by the Bloomberg Barclays US Treasury Bill: 1-3 Months Index which tracks the market for treasury bills with 1 to 2.9999 months to maturity issued by the US government. US Treasury bills are issued in fixed maturity terms of 4-, 13-, 26- and 52-weeks.

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On screen:

A chart shows the S&P 500 (Price Return) at:

 - 11.4% in 2014

 - negative 0.7% in 2015

 - 9.5% in 2016

 - 19.4% in 2017

 - negative 6.2% in 2018

 - and 28.9% in 2019.

The chart shows the MSCI World

(Price Return) at:

 - 7.7% in 2014

 - 0.15% in 2015

 - 6.8% in 2016

 - 16.2% in 2017

 - negative 9.1% in 2018

 - and 24.9% in 2019.

The chart shows the U.S. 20+ Year Treasuries at:

 - 27.5% in 2014

 - negative 1.6% in 2015

 - 1.4% in 2016

 - 9.0% in 2017

 - negative 2.0% in 2018

 - and 15.1% in 2019.

The chart shows U.S. Corporate IG at:

 - 7.4% in 2014

 - negative 0.7% in 2015

 - 6.1% in 2016

 - 6.4% in 2017

 - negative 2.5% in 2018

 - and 14.5% in 2019.

The chart shows Muni Bonds at:

 - 6.4% in 2014

 - 2.8% in 2015

 - 0.0% in 2016

 - 4.3% in 2017

 - 1.6% in 2018

 - and 6.4% in 2019.

The chart shows USD Cash at:

 - 0.0% in 2014 and 2015

 - 0.3% in 2016

 - 0.8% in 2017

 - 1.8% in 2018

 - and 2.2% in 2019.

Text on screen:

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