Is the recession obsession justified?

We don’t think so. During the call, we discuss why we’re recommending investors maintain a balanced and strategic approach.

Listen to our insights on this topic and more.

Coordinator: Welcome to J.P. Morgan’s quarterly market updated titled, Is the Recession Obsession Justified, hosted by Andy Goldberg, Global Head of Market Strategy and Advice, featuring Cayman Wills, Global Head of Equities and Tom Kennedy, Global Head of Fixed Income Strategy.


My name is (Sheila) and I will be your conference operator for today. The information discussed today is for informational purposes only. Opinions expressed herein are those of the speakers and may differ from those of other J.P. Morgan employees and affiliates. Neither J.P. Morgan nor any of its affiliates can represent that the statements or opinions expressed today will materialize. This is not an investment research call. The views and strategies described may not be suitable for all investors, and this call is not intended as personal investment advice or as a solicitation or recommendation. 


If you are considering any investment or strategy, you should speak with your J.P. Morgan representative before investing. Investment products are not FDIC insured. There is no bank guarantee and they may lose value. Past performance is also no guarantee of future results. 


All lines have been placed on mute to prevent any background noise. If you need operator assistance, please press *0 on your telephone keypad and you will be reconnected with your event manager. If you have any questions, please email your J.P. Morgan representative. This call is being recorded. If you have any objections, you may disconnect at this time. Andy, you may begin the call.


Andy Goldberg: Well, (Sheila) that you very much. Your voice must be tired after such a long list of disclosures, but they’re there to keep us all safe. As (Sheila) mentioned, my name is Andy Goldberg. I’m the Global Head of Market Strategy and Advice here at J.P. Morgan Wealth Management, and I’m excited to be joined once again by my colleagues Cayman Wills and Tom Kennedy. And Cayman, Tom, a lot has changed since we did this a few months ago, and I’m excited to have you here to discuss it. 


I’m going to start off with you, Tom, and I’m going to kind of come at you like that. The data in the last few weeks, if you’ve been paying attention has been tough to say the least when it comes to the economy. Just a couple of quick examples. A survey of manufacturers, it’s call the Manufacturing PMI or purchasing manager’s index, came in at the worst level since the global financial crisis. The services version we all know that this is a much bigger services economy than a manufacturing one, but that’s weak too. It’s the weakest that we’ve seen since 2016.


And if you survey CEOs and CFOs around the country, CEO confidence was at the worst level in the last ten years. I would counter that by just saying that this is also a consumption economy. And consumers tend to well when they have jobs, and we saw last week that the unemployment rate ticked down to 3.5% which was the lowest level since 1969 which was the year that Jimmy Hendrix played the Star-Spangled Banner at Woodstock. By the way, if you also look even though it doesn’t feel good this year, the S&P 500 on a year-to-date basis is up 20% and corporate profits are near record levels.


So I want to start with you, Tom. How do we reconcile the weak data that we saw over the last week and, for that matter, data has been weakening for several months with a market that’s seemingly been a little more resilient? Let’s start there.


Tom Kennedy: Great, you’re highlighting the divergence in, what we’re calling hard and soft data. This type of divergence happens from time to time, but hard and soft data should converge over the long term. Let’s first of all acknowledge what those two things are. The soft data is sentiment or survey-based measures. This is how people are feeling in the economy. The questions might be something like Mr. or Mrs. CEO, how confident are you in your business over the next six months? It’s a feeling.


Meanwhile the hard data is physical evidence. What have we seen in the economy? And to your point, I’m glad you highlighted the unemployment rate at 3.5% is a very low number. We haven’t seen it in 50 years. Really important for hard data input. 


We can look back in history and say what is the growth rate consistent with? The hard data and soft data we’re experiencing right now. When we try to model this, the soft data surveys, how people are feeling are telling us growth will be around flat to maybe up a half a percentage point. 


Cayman Wills: The survey data is basically at, you know, call it borderline recessionary level. It doesn’t look good.


Tom Kennedy: Yes, and that’s in stark contrast to what I see from the hard data, which is consistent with growth around 2 1/2% annualized. So clearly a big divergence and giving macroeconomist like myself a challenging picture to decipher going forward.


Andy Goldberg: Sorry to interrupt you, Tom. I know you’re in a flow. Here’s the thing. Sometimes economics will tell me that the survey data that you call the soft data tends to lead hard data like the unemployment rate, which we know is a lagging economic indicator. So I guess the question is, can these two types of data have that gap or divergence for long?


Tom Kennedy: For a good period of time, they can. For months this can go on. I think we often infer that PMI data is a leading indicator. It tells me about where the world will be six months from now. Again, my question, Mr. and Mrs. CEO, what do you think your business will do in six months? But what we’re actually capturing with those surveys is people’s feelings today. So it is largely coincidental, and analytically I don’t think it gives you much leading perception of the economy.


So we can have different feelings and different reality for some period of time. I think we’re experiencing that right now. For all of us I think we need to zoom out a little bit. What’s the big picture? What’s likely to happen? Eventually these things will close. Recall, like we said, we had the similar experience in 2015 and 2016. And for the most part the hard data held up and the soft or survey-based measures firmed or strengthened to meet the hard data. I expect that to happen again this go around.


Andy Goldberg: So we—the title of the call today is, Is the Recession Obsession Justified? I say it slow because it’s actually a good tongue twister. And in fact your team, Tom, (Jake Manukian) and (Joe Sidel) published an excellent piece of thought leadership with that same title. So my question to you is, given everything that’s gone on and I know you and your team have been talking about an upcoming slowdown for the last three calls that we’ve done. Now it’s here.


Tom Kennedy: Yes.


Andy Goldberg: Is the recession obsession justified? And I challenge anyone to try and say that fast three times. Go ahead.


Tom Kennedy: I will not try to say that fast. No, I don’t think it is justified. We should be very conscious and be adjusting portfolios according to recession probabilities which, don’t get us wrong, are elevated. It just should be our base case going forward. I think we should expect trend-like growth in the United States. That’s 1 1/2 to 1 3/4%. Recession odds are elevated. Let’s call them around 30%. And now I often get: Well, Tom, that’s great. You’re giving me these numbers. What does that really mean to me? I think it means you need to have a little bit less risk in your portfolio than you otherwise would.


Andy Goldberg: So just a couple other quick things before we move on to Cayman and talk about equities. Risk is a little bit elevated, but recession isn’t in your base case. You cited a couple reasons why the recession obsession isn’t yet justified. Where’s the Fed right now? You, Tom, you worked at the Fed for almost a decade. Tell us a little bit about what they’re thinking; where they go from here. 


And also I want to ask you after that, just kind of, this is more of binary question. I know that in what we do there’s a lot of shades of gray. But I’m going to force you or ask you to try to be binary for a second and just answer. Look, in the next 12 months is it more likely that we have a recession? Or is it more likely that folks listening on the call today will look back a couple years from now and regret having missed, you know, some form of double-digit routine on a cumulative basis as the market has grinded higher? What—so maybe start with the Fed and then talk to me about whether we’re looking at a recession or regret two years from now.


Tom Kennedy: Yes, the Fed is really the primary reason why recession is not our base case right now. The Fed, for all their challenges in communication over the last year, has done something really special and really different. They have admitted that they were wrong. Remember this time last year, the Fed was telling us they were a long way from neutral.


Andy Goldberg: More hikes.


Tom Kennedy: Yes, an ex-Fed person listened to that and said they think they’re going to go another hundred basis points. Like what is—what are they seeing that I don’t see? But come January, the Fed pivot starts, and the Fed has eased financial conditions a lot. I want to dig in on what that is. Over the last 40 years, the Fed has been very, really very prescriptive in what they would do. The yield curve inverts toward the end of a cycle. They blindly just keep hiking. On average since 1980, they've continued to hike about 1 percentage point despite the yield curve inverting, which should have been telling them to slow down.


Andy Goldberg: Let me break that down real quick. 


Tom Kennedy: Good.


Andy Goldberg: I would—let me force you to recharacterize. I wouldn’t say blindly hiking, but the idea is monetary policy acts with a lag. They’re looking at inflation still growing even though the curve inverted. They kept hiking.


Tom Kennedy: Yes.


Andy Goldberg: And what you’re saying is on average, call it four hikes is needed to grow Fed funds by 1%.


Tom Kennedy: Yes.


Andy Goldberg: So you’re saying hike, hike, hike, curve inverted. This is historically. And then hike, hike, hike again.


Tom Kennedy: Yes.


Andy Goldberg: This time—


Tom Kennedy: This time, yield curve inverts and they are already cutting. They are already reducing rates. And the market’s expecting that they’re going to be after—one year after inversion be 1% lower than where they were when the inversion happened. So remember, historically they raise rates 1%. Now they’re declining rates 1%. That’s a 2 percentage point swing in expectations which supports everyone in the U.S. economy. Interest rates, all else equal, are 2 percentage points lower this time around than where they were last time. 


Andy Goldberg: The 10-year treasury yield today is, call it, in the neighborhood of 1–1/2%. A year ago it was over 3.2%. So that’s a meaningful change. So again, binary, recession in the next 12 months or this grinds on? People regret missing out.


Tom Kennedy: I think—


Andy Goldberg: That’s what people want to know.


Tom Kennedy: No, I don’t think we have a recession. I think we’re going. I like when you make me talk black and white. Most economists are—want to give those probabilities and get them out there. But you have—our base case is that we don’t see a recession. The Fed has changed its tack. They are easing conditions notably. I think they’re going to continue to do that. And then also there- there’s really been no consequence of them easing financial conditions so far. Inflation is still around 2%. And I think a new school economist would argue that they should be cutting because expectations for where inflation will be in the future are too low.


So I think they’re going to have to continue to cut rates despite there being no recession in the outlook. But those two things are intricately linked.


Andy Goldberg: All right, I want to shift and talk about equities, but just to summarize what I heard from you, Tom. You’ve got an economy that’s slowing. You—now in fairness, we’ve been talking about expecting the economy to slow for quite some time, and now it’s here. So it’s no longer a forecast. It’s in the bag. When it happens, it feels yucky, you know. And so we’re going through that process now. We still don’t see the imbalances necessary to have a full-scale recession. I personally like the saying that it’s hard to get hurt falling out of the basement window or the first floor window or something like that. Moreover the consumer looks okay. 


The question for you, Cayman, as the Global Head of Equities is, this is not—it’s also not a super bullish message either. So what—what I heard is a slowing but growing environment. What are we supposed to do and how should investors be thinking about the stock market in an environment that’s, you know, kind of meh?


Cayman Wills: So Andy, the starting point on the equities desk is always corporate earnings. And what I’m watching for is to see if this macro data starts to show up in company results and forward-looking guidance. And so far, what we’re seeing is some of this overhang, particularly around the trade war has been impacting sentiment and confidence, but not showing up in that hard data, the earnings.


Andy Goldberg: Yes.


Cayman Wills: As Tom mentioned, CEOs have looked at this uncertain backdrop and I understand that. If you don’t understand the rules of the game, it make sense that you might pause certain projects. And that’s exactly why we’re seeing consumer and CEO confidence go down, and capital spending going down. And so, I often get the question from clients, okay, so Cayman, on one hand you’ve got risk out there. You’ve got a slowing growth economy. You have the trade war. But on the other hand, you’ve got a market that’s up close to 20%. How do you reconcile that? Is the market just ignoring those potential risks?


Andy Goldberg: Yes, you’re hitting the nail. Like, this is exactly what I wanted to get to. When I meet with our clients, and for that matter anyone, if the market’s up 20% year to date and yet we’ve got all these concerns and slowing data and CEO confidence is the lowest level in 10 years and stuff like that, is the market just too complacent? And you had an answer that really, you know, makes me think twice.


Cayman Wills: Yes, so I break it into two things. First, we often organize our thoughts around calendar years. That’s how we’re taught. Like how did you do last year? But when you look at mid-2018 to where we are right now, we’re basically flat. Now we’ve traveled a lot in that 15 months. When you think about that December selloff we saw. The V-shaped recovery we got when the Fed entered its easing cycle. 


So we traveled a lot, but it’s not like the market has ripped higher in the face of this uncertainty. It’s essentially flat.


Andy Goldberg: Let me just rephrase that. In the fourth quarter of 2018, and it’s actually from September through Christmas, the stock market fell about 20%. The first part of 2019, the market got all of that back.


Cayman Wills: Yes.


Andy Goldberg: And so there was this big V. If you smooth through that V and look at a longer time horizon than just year to date, it’s actually flat.


Cayman Wills: Exactly Andy. But the second thing you’ve got to look at if you can’t just look at the index. You’ve really got to look at what’s going on beneath the surface. Because the market has identified those winners and losers. If you just take an example, two household names; Microsoft and Caterpillar. Since June of 2018, Caterpillar is down 20%. Microsoft is up 40%. That's a 60% difference, a 60% diversion. So this tells me that the market is not complacent.


Andy Goldberg: That’s amazing to me. And by the way just to be clear, for various reasons, we’re not allowed to comment on specific stocks. This is not a recommendation or otherwise for either of these two names. It’s just an insightful observation that really is—when you told me this, it was very revealing. The market has assigned a 60% performance difference between two companies that are in two different businesses based on the environment. It’s hard to just look at the market in light of observations like this and say, “Oh, it’s complacent.” It’s doing its job.


Cayman Wills: Yes.


Andy Goldberg: I guess my question for you then is, how are we investing in light of an environment that’s making these distinctions?


Cayman Wills: Yes, so we’ve been approaching it with a barbell strategy. And basically we’ve been doing that for some time. What are the sectors where we want to take risk? And then how do we balance that out with more defensive positioning? So where are we taking risk?


Andy Goldberg: And that’s where you start with the barbell.


Cayman Wills: Yes, exactly.


Andy Goldberg: Tell me what a barbell is again just, in case I’m not sure.


Cayman Wills: So you haven’t been to the gym for a while, I know. 


Andy Goldberg: Okay.


Cayman Wills: So a barbell is where you’ve got your weights on one side and then your other weights on the other. They balance each other out. So as you’re doing your chest press you’re not wobbly. 


Andy Goldberg: Okay.


Cayman Wills: Okay, I’m going to pay for that one.


Andy Goldberg: No.


Cayman Wills: Okay, so first where are we taking risk? What’s the left side of that barbell? These are areas where we see strong secular growth stories; namely tech and communication services. If we remain in a slow growth environment, it will not derail the long-term growth prospects that we expect to see from areas like 5G, artificial intelligence, data center expansion, and e-commerce. And so I don’t want to regret not investing in these stories simply because I think there might be a cyclical downturn.


Andy Goldberg: Yes, you’re saying, like, look five or ten years down the road.


Cayman Wills: Yes.


Andy Goldberg: I don’t want to look back and say, “Oh, I missed the opportunity to invest in the explosive growth in all the industries related to data and data science because I was worried about a cyclical recession.”


Cayman Wills: That’s right.


Andy Goldberg: Okay.


Cayman Wills: So now the other side of that barbell though, Andy, is healthcare and staples. These are more defensive positioning. These are more resilient sectors. They tend to perform better in times of market stress. And an interesting data point, healthcare has posted positive earnings growth in every year for the past 20 years even through the great financial crisis. 


So really interesting stat, plus many companies within these two sectors pay attractive dividends. So I love finding companies that pay good dividends and that’s supported by management’s commitment to preserving, and more importantly potentially growing those dividends over time.


Andy Goldberg: Yes, I think it’s fair to say if you’re able to pay and if, for that matter, grow your dividends in an environment like this, it probably tells you something about the quality of the management. It probably tells you something about the durability of the cashflows. So I understand where you’re at. You’re not just saying S&P 500. You’re saying we have to be selective. We have to respect the trends and differentiation that we’re seeing play out in the markets in the macro that Tom alluded to. You haven’t touched on the rest of the world. How are you seeing just broadly non-U.S. equities?


Cayman Wills: Yes, so I’ll touch on the rest of the world, but then also give you our forecast, Andy.


Andy Goldberg: Great.


Cayman Wills: China has struggled since the onset of the trade war. And it is dragged Europe down with it. Europe has a lot of manufacturing and export companies, and also has a struggling financial and bank sector. Plus, it isn’t helped by the absence of technology in the region. Within EM, I’d say that India is the bright spot. We’re seeing a lot of structural reform. Recently announced tax changes that are favorable to those corporations as well as an accommodative central bank policy.


But now, when I zoom out and I look at the map and I think about where we will be in mid-2020, we’re calling for single digits across the board. And so in the environment, the U.S. is where I want to put our chips. And I view the U.S. as both a defensive and offensive play.


Andy Goldberg: That’s the barbell.


Cayman Wills: Exactly, so, defensive because U.S. in 2018, yes it was down 4%. Europe and EM were down over 10%. Now in 2019, year-to-date S&P up almost 20%. Europe up only about 10%. EM up about 5%.


Andy Goldberg: Okay, super helpful, Cayman. Give me a bottom line, you know, over the—and again, I’m just thinking on behalf of the listeners, you know, and our clients. But what I really want to know is should I be invested today? Equities up or down over the next 12 months. I think you said up.


Cayman Wills: Yes, up and outperforming bonds.


Andy Goldberg: Okay. So I’m going to add a quick summary here to what I’ve heard so far. And then I want to move into a couple of messier topics related to politics and stuff like that. The first thing that I heard that I personally am going to take away from this is that we have to acknowledge the dispersion that we’re seeing and respect what we’re seeing in the market. It actually aligns to the macro. The market’s not dumb. The collective wisdom of investors around the world are differentiating between winners and losers. And I think what you’ll have heard from Cayman’s comments and you’ll hear more from Tom’s comments in a minute, that’s how we invest here at J.P. Morgan.


The other thing I would say is that with downside risk like the one Tom outlined on the rise, we need to play into that. Later in the conversation I’m going to highlight some of the things that we’ve done in portfolios, but suffice it to say we have become more defensive. Full stop. And I think that’s really important. 


So let’s talk about some of the messier things. And this always makes me a little bit uncomfortable. I’ll be very honest in the sense that whenever I have to think about the political impact or the political economy impact on markets and investing, you run the risk that emotions get high. We at J.P. Morgan approach this strictly from a numbers basis. We’re doing the analysis to try to understand what policies that have been proposed or plan to be implemented could have on, excuse me, the economy, on markets and on our clients’ balance sheets.


And so I guess where I would start is what should we make of all the political headlines? And I’ll tell you right now the biggest question that we’re getting, and this is not just from clients in America. We’re getting this from all over the world. The 2020 election, that seems to be a huge focus. How should I start to put some thoughts or some structure around that? And this is for either one of you.


Tom Kennedy: Yes, I mean for me, Andy, the first thing—place I start is almost to temper the concerns so far. It’s not say they’re not important. These are really big issues. It’s really to just to say we’re so far away from the election, still more than a year. And there’s still a lot of clarity that we need there. We still don’t even know what the Democrats will bring to the table. To hammer this out, let me ask you a question.


Andy Goldberg: Okay.


Tom Kennedy: Leslie Clark, the name ring a bell to you?


Andy Goldberg: Hockey player? I have no idea.


Tom Kennedy: Yes, it shouldn’t. He held the lead of Democratic polls for the nomination one year out from the 2004 election. Exactly.


Andy Goldberg: Where are they now?


Tom Kennedy: Yes. Rick Perry led the Republican polls one year ahead of the 2012 election. So we’re still far away and these two people, we don’t talk about them regularly and one of them didn’t even ring a bell. So we’re still far away. There’s still a lot of things to come up with. And remember, the White House is just one piece of this. We have to see—to see some of the policies come through. We would need really a unified all three segments of government for that to be impactful.


Andy Goldberg: But Tom, I’m going to push on you a little bit because I think we need to focus more on this election because of the direct implications between policy proposals and financial markets. Because some of the policies that have been proposed by leading Democratic candidates would stand in stark contrast to the business-friendly environment that we’ve been operating in. Namely deregulation and lower corporate taxes.


And some of the specific examples that I’m thinking of include eliminating corporate taxes or corporate tax cuts, sorry, curbing stock buybacks, breaking up banks and tech firms. And just as an example of how much corporate taxes matter, they provided an 8 to 10% boost to S&P when they went through. If you hold the PE constant and everything else, you might expect a similar market decline should that be reversed. 


That coupled with some proposals that are really going to touch many of our clients. So a wealth tax of 2% on amounts over $50 million. Taxing unrealized capital gains. Changes to the estate tax rates. And so I know we’re all about the fundamentals here, but the policy implications here are important and will weigh on investor psychology. I think from now all the way through probably next spring.


Andy Goldberg: Understood, so look let me take a little bit from each of—from what I just heard from both of you. I mean what I’m hearing from Tom is first and foremost, we’re a long way out. There’s a lot of clarity that we don’t have yet. I mean I remember in the last election cycle at this time, Jeb Bush was the leading potential nominee for the Republican party. So there’s a long way to go.


I also take Tom’s point that, you know, it’s not just the White House. You have to see what happens in the broader Senate. But to Cayman’s point, there are real risks here that we have to pay attention to, and just for those of you joining us today, and by the way we really appreciate that. Tom, Cayman, myself and some of our other colleagues just had a really insightful phone call with our Head of Government Relations here at J.P. Morgan. And I just want to let people know that our firm and other firms across corporate America are really left with essentially two options. Just pretend that this isn’t happening or plan and be prepared.


And both at the corporate level and here in the way that we make investment decisions, we’re taking these things seriously. And we’re going to continue to monitor these situations. It’s too early. Let me just give you a quick timeline, by the way, okay? The next Democratic debate is October 15. I’m a little bit less focused on that. But the first—the Iowa caucus is in February, February 3. That’s a ways out. And by the way, a lot happens between the Iowa caucus and the Super Tuesday one which is Alabama, Arkansas, California, Colorado, Maine, and seven others, on March 3. The Democratic National Convention is in July whereby then you’ll have a candidate and a platform and that’s when I expect most of the market reaction to start happening. So we have some time, but we’re working very closely on that.


Tom, another messy one, and sorry. Let me just, for those of you who have more questions on this, like don’t be shy. I want you to speak with your Advisor about this because there are certain proposals or situations that may affect you personally that you’re concerned about. And we want to work through those with you. And you’re going to hear more specifics about this from us going forward. But I just can’t stress enough how, while it’s far away, we don’t take it lightly.


Last topic before we conclude the call today, and by the way one of the hardest things about these calls is deciding what to leave out. There’s so much more to talk about. But I do want to talk about the trade war again. Tom, what —what’s our latest thinking here?


Tom Kennedy: Yes, I think we’re hitting on both of these. I mean you were calling them messy. They’re really just uncertain. These are uncertain events and uncertainty is bad for the economy and it’s bad for markets. Uncertainty over the course of this year has been manifesting itself in really slower business investment. And that looks and feels like slow growth. 


I think though we give the trade war too much credit for the slowdown. And even if we get—


Andy Goldberg: I meant, by the way, everyone’s blaming everything on the trade war. I try. I forgot to make my daughter lunch and my wife got yelled at. And I said it’s the China trade war. That didn’t fly.


Tom Kennedy: I guess when you rope in that uncertainty, it’s hurting everything. Even if we get a deal we shouldn’t expect growth to meaningfully accelerate. And I think that’s just another way of saying it’s not just the trade war that is forcing markets here. 


There’s really two things. There’s a natural slowdown that we should expect in this economy. We’ve used up a lot of our capacity. And—


Andy Goldberg: What’s that mean?


Tom Kennedy: Yes, so growth is driven really by two things. You can put more people into the economy, or you can make them more productive. Get more out of them for every hour they work. Now the unemployment rate at 3 1/2%. There’s not many people sitting around that we could just pull into the labor force. And productivity has picked up a little bit, but we’re not seeing a meaningful increase in productivity. So even if you remove trade, growth in the economy overall should be slowing just because we have used up a lot of our capacity. 


The second is we’ve had an abundance of inventory buildup in the global manufacturing and supply chain. Following Trump’s election, there was lots of exuberance, optimism. And then you layer on tax cuts, we had CEOs in 2017 and 2018 saying I’m going to invest in my business. I’m going to expand. And with the benefit of time, we really haven’t seen that. We’ve actually seen CEOs decide to take their tax rebate and give it back to investors via dividends and stock buybacks. 


So there’s a lot of inventory that had to build up to meet that future demand that never came. So that’s a challenge for the growth trajectory going forward. And we just need time to work through that.


Andy Goldberg: And by the way, let me take the liberty of adding a third to your list of two. I mean, look, the Federal Reserve did raise interest rates nine times which is in effect, kind of tapping the brakes on growth nine times in a row. And it’s not surprising to me that has the effect of slowing things down. But I want to stress, and this is where, you know, as investors we all run the risk of becoming too emotional. There’s a difference between slowing down from, you know, 55. We weren’t going very fast in the first place but going 55 miles per hour on the highway down to 40 or 35. There’s a difference between that and stopping or going in reverse.


We’ve been calling for a slowing economy for a while. Now it’s a reality. And it’s stoking concern. And so it’s not just a trade war. The one thing I would add on the trade war that I think is interesting, the conventional wisdom at the onset of the trade war was that the president’s going to want to get a deal especially before the election. You know, Tom, you were saying to me like, you know, at the end of the day the most important thing for a sitting president as an incumbent candidate is the economy.


Tom Kennedy: Yes.


Andy Goldberg: And so it stands to reason that like heck, he’s going to find a way to juice the economy and get animal spirits again with a deal. He’s going to have to balance that though, we think, against what’s actually become a pretty popular position. People on both sides of the aisle whether you look at voters or in Congress, support the tough on China mantra.


Tom Kennedy: Yes.


Andy Goldberg: In fact, Elizabeth Warren, one of the Democratic candidates, in a recent debate tried to out hock Trump on essentially saying, you think he’s tough on China, wait until you see me. And so that’s a popular political stance. So we’re— in other words it’s hard to say that we see the end of the trade war any time soon. But Trump also has to balance that with the need to have the economy strong going into the election.


Any other final thoughts before we wrap it up from both of you? Wonderful. I really appreciate your insights. I think it’s balanced. I think it’s logical. And just to conclude I’ll just offer three quick observations. We want to acknowledge the recession risk. I mean there’s no doubt that it’s become incrementally higher. But I’m not going to let it paralyze me. I want to talk to my Advisor. I want to start with my end goal in mind. What am I trying to achieve with my money? What’s my time frame? How much risk do I need to take in order to get there? How much capacity for risk do I have? These are conversations that should inform how I’m investing more so than the fickle nature of a cycle, particularly if its long term.


The second thing I’d remind investors, and I talk—I’m talking to myself a little bit here too. I get nervous too. I’m a human being too. But we have to remember that investing and in our portfolios are not a light switch. We don’t get in or get out or turn them on or turn them off. We think of them as dimmer dials. It’s a continuum. And when I think about the money that we manage for clients at J.P. Morgan, in our managed portfolios or in the recommendations that you heard from Tom and Cayman, from our brokerage capability, we’ve turned that dial in terms of risk down.


Just a couple quick examples, about 18 months ago our managed portfolio had an overweight to equities, a significant one, of 8%. We’ve dialed that back down to 2%. And that’s not it. Even within equities the positioning reflects the barbell that Cayman articulated. We want to have exposure to secular growers, but we also want to have some stocks that might help us sleep a little bit better at night. 


We’ve also reduced credit risk or high yield in portfolios. About 18 months ago, the high yields in our managed portfolios was 40, that’s 4-0, 40% of our fixed income exposure. Now it’s down to about 0. And we’ve swapped that out for what we would call duration or core bonds. Which again, could outperform in an adverse scenario. And overall these are portfolios that are simply more defensive.


That is in light of the risk that a lot of us are concerned about and that we’re talking about. So those—that’s where I want to leave it. We continue to want to participate, but with added protection. We’re thinking about dividend strategies, structured notes and goals or core bonds. We want to continue to find growth in a slowing growth world and we’re looking to technology and communication services areas.


And we continue to identify ways to extract yield now that yield is so low. We’re looking at dividends preferred. We look to real estate. So there’s a lot to do. Don’t let the uncertainty paralyze you. And Tom, Cayman, thanks for joining us, everyone as well. We’ll see you next time. Thanks.


Coordinator: Thank you for joining us. This concludes our call. You may now disconnect.




Cayman Wills is the Global Head of Equities.

Tom Kennedy is the Global Head of Fixed Income Strategy.

Moderated by:

Andy Goldberg is the Global Head of Market Strategy and Advice.