Investment Strategy

A recession in the near term is possible, but not probable. Here’s why.

It will take time for growth to slow down, but investors should consider some changes now.

Our Top Market Takeaways for April 01, 2022.

Market update

Quarter pole


It will be a first quarter to forget for most investors. The only major indices to post positive returns were commodities (energy stocks, oil, natural gas, copper, gold, wheat, etc.). U.S. stock markets, while volatile, ended down only -4.6% (and they started the year at all-time highs). European equities fared worse, given their physical and financial proximity to Russia’s war in Ukraine.

The much bigger story is the poor performance of fixed income. Remember, bond prices are inversely correlated with interest rates. Given the major pivot from global central banks toward fighting inflation, aggregate bonds had their worst quarterly performance in at least the last 30 years.

This chart shows the year-to-date total return (USD) for: - Commodities: 25.5% - Gold: 6.7% - USD Cash: 0.0% - U.S.: -4.6% - U.S. Corporate HY: -4.9% - World: -5.0% - U.S. Treasury: -5.6% - EAFE: -5.8% - U.S. Agg. Bonds: -5.9% - Japan: -6.4% - EM Equity: -6.3% - Europe: -7.2% - Asia ex-Japan: -8.0% - EM Debt: -9.2%

Here are some other notable observations from the first quarter:

  • The best-performing S&P 500 sector is energy, up a staggering 40%. The only other sector in the green is utilities (+4.8%).
  • The worst-performing S&P 500 sector is communication services. Meta (nee Facebook) alone is responsible for three-quarters of the decline.
  • The 10 best-performing countries in the MSCI universe are classified as Emerging Markets.
  • Out of the 47 countries we track, 21 have positive performance, 25 have negative performance, and one (India) is flat for the year.   
  • $8.7 trillion of global negative yielding debt has evaporated as global interest rates have risen.
  • When the year started, the market expected U.S. policy rates to end 2023 at 1.50%. Today, markets expect policy rates to be at 3% by then.
  • When the year started, the market expected Eurozone policy rates to end 2023 at 0.0%. Today, markets expect policy rates to be over 1.25% by then.

The last week of the quarter also gave investors another thing to worry about.

The U.S. 2-year–10-year yield curve inverted, which only emboldened those who believe a near-term recession is inevitable.

While we think a recession over the next 12 to 18 months is certainly possible, we don’t think it is probable, and certainly not inevitable.  


Why a recession is possible, but not probable


The case for a recession over the next two years is pretty easy to make.

Central banks are committed to getting inflation down, and Federal Reserve Chair Powell has stated he will actively restrict economic growth to make that happen. The European Central Bank is likewise poised to raise rates for the first time in a decade. More often than not, central bank tightening cycles end because the Fed incentivizes saving over borrowing or spending, thereby disrupting economic activity.

The bond market has already started to suggest that this ends with trouble. The most watched section of the yield curve (the spread between 10-year and 2-year Treasuries) inverted this week. This has traditionally led a recession in the United States by a little over a year.

This chart shows the spread between 10-year and 2-year Treasury yield and the recession bars, from June 3, 1976, to March 29, 2022. The first data point came in at 0.7% and rose to a peak of 1.7% by February 28, 1977. Here, it declined to -2.4% on March 20, 1980. From there, it rose back to 1.3% on July 18, 1980, before dropping back to -1.7% on May 21, 1981. Then it rose to a peak of 1.7% by January 2, 1985. Here, it declined to -0.4% by March 29, 1989, before rising to an all-time high of 2.7% by July 14, 1992. From there, it declined to -0.5 on April 7, 2000. Here, it rose to another all-time high of 2.7% by August 13, 2003. From there, it dropped to -0.2% on November 27, 2006. Then it rose to another all-time high of 2.9% on February 22, 2010. Here, it declined to 1.2% before surging to 2.6% by January 1, 2014. From there, it declined to -0.1 by August 27, 2019. Then it rose to 1.6% by March 31, 2021. From there until recently, it declined to 0%. The recession bars show the recession periods. There was a recession: - May 21, 1980, to October 31, 1980 - November 6, 1981, to April 6, 1983 - February 20, 1991, to September 25, 1991 - August 14, 2001, to April 26, 2002 - April 18, 2008, to September 11, 2009 - March 11, 2020, to May 8, 2020 Highlighted, we have the inversion points: - August 17, 1978 - May 2, 1980 - October 7, 1980 - December 27, 1988 - March 13, 1990 - June 12, 1998 - August 3, 1998 - February 1, 2000 - December 28, 2000 - February 1, 2006 - May 21, 2007 - August 26, 2019 - September 24, 2019 - March 29, 2022

There are more concerning signs. Sentiment among consumers is horrible, especially their expectations for their future situations. Russia’s war in Ukraine is adding uncertainty and causing commodity prices to spike. Mortgage rates have seen their biggest six-month surge in 50 years, causing housing affordability to plummet. At some point, those calling for recession argue, the consumer has to crack. In Europe, the proximity to the Russian war in Ukraine as well as reliance on Russian oil and natural gas increase near-term recession risks. Slower growth in Europe would surely impact the United States.

But just because an argument is easy doesn’t mean it is right.

The Fed is going to fight inflation this year and likely into next, but there are many other ways for inflation to fall regardless of what happens to interest rates.

There are more signs of softening in supply chains and semiconductors. In the United States, used car prices have declined for two months in a row. Taiwan Semiconductor stated it is seeing softening demand for smartphones, PCs and TVs in China. The Logistics Managers Index, which tracks supply chain metrics in the country, suggests that inventory growth is surging—a sharp reversal from last year, when fears over goods shortages had consumers and businesses worried about Christmas. This development is especially welcome as China faces more lockdowns that could further disrupt supply chains. The backlog of ships waiting off the coast of Los Angeles continues to decline. All of these signs could lead to weaker goods prices over the course of the year, which means inflation could soon look much more tolerable.

We also do not see a clear debt imbalance that could exacerbate a downturn. Both businesses and consumers across the United States and Europe have historically healthy balance sheets. Household debt growth is merely recovering back to historic norms after collapsing during the Global Financial Crisis. Corporate debt growth is elevated, but leverage and debt service ratios are far from alarming. Most consumers still have excess cash from pandemic-era savings, as well as the ability to borrow more to continue spending.  

This chart shows the net increase of corporate and household liabilities as a % of GDP (5yr moving average) and recession bars, from December 31, 1969, to December 31, 2021. The first data points are 4.5% for corporate debt and 3.1% for household debt. From this point, liabilities rose through the mid-1970s’ recession before household debt peaked at 5.7% in March 1980 and corporate debt reached a series high of 8.4% in March 1982, which was during a recession. From here, corporate and household debt fell to 3.2% and 3.8%, respectively, in September 1994. Then corporate debt rose to 7.6% in March 2001 before falling through the 2001 recession and continuing this decline to reach 2.5% in March 2006. From here, corporate debt then spiked to 4.8% in December 2008. Household debt rose steadily from 1994 to reach a series high on 9.0% in June 2007. Both household and corporate debt then fell after the Global Financial Crisis to both reach series lows in 2013. Corporate debt bottomed at 2.2% in December 2012, and household debt at -0.1% in September 2013. From here, liabilities have risen to their most recent data points in December 2021: corporate debt at 6.0% and household debt at 3.2%. The recession bars show the recession periods. There was a recession: - March 31, 1970, to March 31, 1971 - December 31, 1973, to June 30, 1975 - March 31, 1980, to December 31, 1980 - September 30, 1981, to March 31, 1983 - September 30, 1990, to June 30, 1991 - March 31, 2001, to March 31, 2002 - December 31, 2007, to September 30, 2009
Corporate profit margins are key pieces of evidence that argue against a near-term recession. In the post–World War II period, after-tax profit margins have peaked several quarters before recessions began. Today, despite surging input and labor costs, after-tax profit margins are at all-time highs. This suggests that businesses have little incentive to reduce costs and lay off workers. If margins do start to decline, the clock could be ticking faster toward recession. 
This chart shows the 4-quarter moving average of U.S. after-tax corporate profit margins and recession bars over the period of March 31, 1950, to December 31, 2021. The first data point is 10.8% and fell sharply to a decade low of 7.6% in June 1954, one month after the end of the first recession of our observation period. The corporate profit margin then rose to 10.2% in December 1955 before falling back below 8% in June 1957 and rising sharply from here to peak at 12.1% in March 1966. From here, the margin fell over the next four years to bottom out at 6.4% in December 1970 after the early 1970s’ recession. Corporate profits margins then stayed within the 5–9% range over the next two decades before hitting a new low of 5.2% in March 1991 during a recession. From here, there was a decade without a recession when margins peaked at 9.5% in December 1997 and sharply fell in the lead-up to the next recession, which started in April 2001. Shortly after this recession ended in November 2001, corporate profit margins reached a series low of 5.1% in December 2001. From here, we saw a rise to 10.4% in September 2006 before again falling sharply in the lead-up to the Global Financial Crisis. During this recession, margins bottomed at 7.9% in September 2009. Since then, corporate profit margins have risen to the latest data point of 13.0% in December 2021, which is the highest across the entire series. The recession bars show the recession periods. There was a recession: - August 31, 1953, to May 31, 1954 - September 30, 1957, to April 30, 1958 - May 31, 1960, to February 28, 1961 - January 31, 1970, to November 30, 1970 - December 31, 1973, to March 31, 1975 - February 28, 1980, to July 31, 1980 - August 31,1981, to November 30, 1982 - August 31, 1990, to March 31, 1991 - April 30, 2001, to November 30, 2001 - January 31, 2008, to June 30, 2009 - March 31, 2020, to April 30, 2020

In fact, the U.S. job openings rate, which is a measure of labor demand, is at all-time highs and still climbing. An early sign that the labor market may be cooling would be to see the job openings rate fall, or at least stabilize. The labor market is likewise on strong footing in the Eurozone, where the unemployment rate is the lowest it’s ever been. Higher interest rates will work to slow down the labor market, but there is a long way to go before the economy enters a self-reinforcing downturn marked by rising unemployment.

We agree that growth will slow, especially in the housing market and durable goods sectors. Higher interest rates and higher prices will all pinch consumers, and the surge in mortgage rates is already showing signs of cooling the housing market. But rather than a recession, the more likely outcome is a deceleration in growth from the blistering pace it set last year back down toward or slightly below trend through the first part of 2023.

Investment implications

Prepare portfolios for slowing growth


The yield curve stole the headlines this week, but it is really only one of many indicators that are telling us we are transitioning from the middle stages of the cycle to the later stages of the cycle.

But that isn’t a reason for long-term investors to panic, it just means they should consider some changes to portfolios. For us, this means focusing on quality equities and reducing underweights to core fixed income.

Broad equity markets tend to do well after the yield curve inverts (average returns of 20% to 25% between inversion and the eventual peak in stocks), and we don’t have a compelling reason to think this experience would be different. Within equities, we are more focused on sectors that could provide more consistent cash flows (such as healthcare) and sectors that could outperform on a relative basis as growth becomes scarce (such as technology) than we are on sectors that are tied to cyclical economic growth. For what it’s worth, both sectors have posted positive performance and outperformed the market in between yield curve inversion and recession in three of the last four instances.

In fixed income, the yield curve inversion brings an added sense of urgency toward adding back to core bonds. Both municipal bond yields (~4.3% tax equivalent) and U.S. investment grade credit yields (~4%) are at their highest levels since early 2019. In a real recession, we would expect both to offer 5%–7% returns as interest rates fall.

For the first time since the pandemic began, investors are being paid an adequate return to invest in what we believe is a relatively safe asset that would likely offer portfolios some protection if a recession does come to pass.

For more on how we are guiding your portfolio through the market cycle, please contact your J.P. Morgan team.  

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All market and economic data as of April 2022 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.


• Past performance is not indicative of future results. You may not invest directly in an index.
• The prices and rates of return are indicative, as they may vary over time based on market conditions.
• Additional risk considerations exist for all strategies.
• The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
• Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.

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